European gold sale blunder reaches $40 billion
While the Chinese were adding to their gold stock over the last several years, Europeans were selling – with disastrous results. Back in 1999, Gold prices were depressed after an almost two-decade bear market. For some strange reason the Bank of England decided this would be a good time to start to sell its gold. Other European central banks followed. Even the Swiss, whose currency had been backed by gold jumped in with both feet. The result? A loss of $40 billion.
Europe’s central banks are $40bn poorer than they might have been after they followed a British move taken 10 years ago on Thursday to shrink the Bank of England’s gold reserves, analysis by the Financial Times has shown.
London’s announcement on May 7 1999 that it would sell a large share of the Bank’s gold reserves in favour of assets offering a return, such as government bonds, was the high water mark of so-called “anti-gold” sentiment among European central banks.
Many of these banks, such as those in France, Spain, the Netherlands and Portugal, decided later in 1999 to follow Britain and sell off their reserves. At that time, gold was worth around $280 an ounce, less than a third of its current level of more than $900.
European banks sold about 3,800 tonnes of gold, reaping about $56bn, according to calculations from official sales data and bullion prices.
Taking into account the likely returns from the investments in bonds, the banks have gained another $12bn. But because today’s gold prices are far higher, they are about $40bn poorer than if they had kept their reserves.
The biggest loser is the Swiss National Bank which sold 1,550 tonnes over the decade and at today’s gold prices is $19bn poorer, followed by the Bank of England, which is $5bn poorer.
Now, when I posted the article about the Chinese secretly stocking up, a number of commentators said in effect, “no big deal.” Well, it is a big deal, because it demonstrates the degree to which the money we hold has depreciated in value. The central banks sold at exactly the worst time and the Swiss were the worst of the lot. The Swiss must be especially chagrined given the catastrophic losses suffered by the once staid and stodgy Swiss jewel of a bank UBS. In my view, this episode demonstrates the degree to which we had bought into the fiat currency regime which was ushered in in 1971. So sure were the central banks that they sold 3800 tons worth. Ten years later, this decision is looking more hubristic than foolhardy.