Productivity | Strategy | Profitability
Productivity | Strategy | Profitability
Brown's Bottom: The Crucial Function of Gold in Relation to Fiscal Policy & Credit
The now-infamous sale of the UK’s gold reserves under then-Chancellor of the Exchequer Gordon Brown, who went on to become British Prime Minister, happened between 1999 and 2002. The gold price was then at its lowest in twenty years, after a sustained bear market. Brown managed to justify and oversee the sale of around half of the UK’s gold reserves, approximately $3.25 billion, which constituted about a quarter of the country’s foreign currency net reserves, reports Oliver Taylor.
Although tied into the quantitative easing project embarked upon by numerous big players - Japan, the USA, the EU overall and the UK specifically - the move is now widely seen as one of the worst ideas to ever befall the British economy. Many commentators allege private interests, rather than a country’s fiscal well-being, were at the heart of the move.
Brown used the funds generated to buy euros and other fiat currencies and now, with the euro largely subject to European Central Bank president Mario Draghi’s stance on matters, as well as the gold price having since more than quadrupled, it seems to have been an incredibly poor decision. The ECB’s president is currently winding down the stimulus generated by the bank’s huge, three-year bond-buying exercise within the eurozone economy. Moreover, as the hawks and doves battle for supremacy on the bank’s council, the decision to phase out QE is being accompanied by a less hardline stance on interest rates.
Brown limited the UK’s cushion and rendered the country far more subject to European Central Bank policy and broad economic instability. In spite of the fact that the ECB will maintain base interest rates at 0.0 percent until at least late 2019, thus limiting fallout from the end of QE, the euro is still being sold off. From being a shining light, readily comparable to the US dollar, the euro is now a far more tenuous currency than ever before. Having started QE, there was never going to be a good moment for Draghi to end the exercise. Now, the eurozone is experiencing what economists term a “soft patch,” while protectionist risks are on the rise as well.
All countries hedge against the prime fiat currencies and market turbulence, but the UK has now lost much of its reserve ability to stabilise its own economy. Germany is leading the hawkish drive at the ECB, uncomfortable as it is with the approximately €2.4 trillion worth of assets accrued by the bank during its QE program. The ECB has been buying some €30 billion in assets monthly, although this is now to be phased out by end-2018.
A 2012 report from The Chatham House Gold Taskforce noted that “Gold has a role to play as a reserve asset for central banks,” and that “Gold can serve as a hedge against declining values of key fiat currencies, and can also be useful for central banks looking to diversify their foreign reserves.” Although the report goes on to acknowledge that gold can be volatile as a reserve asset, with the benefit of hindsight, all facts taken together point to a moment of unseemly irresponsibility on the part of then-chancellor Gordon Brown in managing the UK’s economic interests.
LOOSE MONETARY POLICY PROBLEMS
The consequences of loose monetary policy, epitomised by the abandonment of a gold standard and largely adopted by key global governments and central banks, has potentially dire consequences. In a seminal paper, famous investor Warren Buffett’s father Howard Buffet years ago outlined his rationale and support behind the necessity for gold reserves. Although the USA abandoned the gold standard decades ago, all nations including America, the UK, the EU and Japan that have adopted QE as strategy, are running tremendous risks of either slow or more rapid economic erosion, if not long-term collapse. Broadly, gold is a human storehouse of wealth, and while the machinations and fiscal policies of governments might seem far removed from the average citizen’s life, many are questioning whether formally dismantling humanity’s employment of gold as a reserve asset, a storehouse of wealth, should fall within any government’s mandate.
From a relatively stable arrangement of gold reserve assets, nations that practised and continue to practise QE are essentially removing a huge platform of support if they opt to deplete their gold reserves. The gold standard is more a product of human evolution rather than any government policy, and as such has potentially dire consequences when shrunk or abandoned. Although there are always good arguments for and against most economic strategies, the need to hedge against fiat currencies like the yen, dollar, GBP and EUR remains paramount in any modern, globally interactive economy - and even more so with less-connected, emerging economies.
Although the ECB’s QE program has been well managed, many see it simply as a delaying of dire repercussions waiting down the line. In short, the UK now finds itself not only having missed the value of a huge rise in the price of gold since Brown’s sell-off, but also now operating in a far more fickle environment. An environment where currency values and overall economic health are no longer backed by an internationally equitable reserve, but more determined by parliamentarians and government policies, both transient entities without long-term accountability.
Problems around dismissing or even diminishing the acceptance and value of gold reserve assets can be glimpsed in a number of metrics. Since the rising gold price is typically an indication of a failing currency, the UK has not managed to avoid the fact that the price of goods and services in that economy has greatly increased. In addition, fundamental considerations have been largely avoided in the whole QE and disregard-for-gold exercise.
Precious metals force central banks and governments to remain honest, with no margin for special interests creeping past the baseline and unanimous acceptance of the asset’s value. Any fiat currency delinked from gold’s backing essentially allows a government printing press to expand the supply of the currency in circulation, based on policy, not held reserves. The price of property, vehicles, food, fuel, water, utilities, as well as goods and services can only increase on the back of reserve assets when fiat currency is backed by gold reserves. Now, all QE players have but state fiscal policy to manage the fundamental health of their economies.
In the case of the UK, coupled with that nation’s pending Brexit and intractable connections to Europe and the world at large, Brown’s butchering of gold reserves has already resulted in cost of living increases, despite the ECB’s ability to keep inflation at or below two percent. A large part of fundamental security is lost to an economy with diminished reserve assets.
Although America has flouted all predictions of dire consequences in abandoning the gold standard to date, it also has a $3 trillion trade deficit with China. With global political powers shifting, it too seems destined to be a delayed statistic of the same decision made by Brown circa 1999. While the USA previously traded on being the world’s only real superpower, that landscape has evaporated over the last decade, and America now has but the dollar’s historical standing as a hedge against overrun, in a nation now largely devoid of manufacturing capacity and many other previously intrinsic components of an American life.
INVESTING IN GOLD’S VALUE
In a real sense, private investors are critical to maintaining gold as a storehouse of wealth. Now more than ever, it is advised that investors ensure that precious metals form a part of their portfolio, as governments play fast and loose on monetary policy. While citizens within any economy are subject to the national fiat currency’s rise and fall, they can hedge against any looming abyss by ensuring that gold remains a component of their investment portfolios.
Looking at the current worldwide financial malaise, constantly debated in global economic forums, the best advice available now insists that precious metal inclusion hedges against fiat speculation in any private portfolio. The UK provides an alarming current example of the repercussions of abandoning gold reserves, where unfortunately the more ominous predictions are slowly starting to manifest.
Digital assets like cryptocurrencies are indeed emerging as a new prospect for the world’s citizens, a new storehouse and a potentially new way of doing things. That said, the transition from fiat to cryptocurrency will undoubtedly be slow, and is also far from guaranteed. For all intents and purposes, humanity cannot afford to diminish gold reserves as a standard of economic health and fiscal conduct anytime soon. In the here and now, the defraying of gold reserve assets holds the prospect of complete collapse, something many economists consider an unacceptable risk, whether or not it ever manifests.
Gordon Brown sold just under 400 metric tonnes of gold at $275 per oz, announcing in advance what price the asset would be sold at. This last observation gives the lie to his insistence on “balancing reserves” and diversifying assets, reasons given at the time. Looking back, it seems that Brown was merely playing to private banking interests’ short positions, as he wilfully drove the gold price down and also sold off at artificially low prices, something in direct conflict to his stated desire to “balance” reserves.
Brown appears as nothing less than a panicked trader, except that his portfolio was the UK’s gold reserves. Although gold was in a low ebb, it remains anathema to the standard economic model that gold reserves are lumped into equations as just another tool of monetary policy. Gold reserves underpin, enable and should formulate monetary policy. Imagine for a moment, against the backdrop of inflation’s constant eating away at the lives of global citizens, that Canada or Germany were to enact a “Trudeau’s Bottom” or a “Merkel’s Bottom.” It would be but a matter of time before such a foolhardy monetary policy destroys the value of purchasing power, ultimately and inexorably leading to civil unrest. EG