Since announcing its plan to auction 415 tons of gold in 1999, the Bank of England has been severely criticized, even embarrassed as England received low prices for the family jewels. The World Gold Council noted that the BoE had abandoned the ultimate reserve for any currency. Sub-Saharan nations railed that the lower gold prices brought on by the auctions have hurt the very countries that the developed nations have often rescue with financial aid. While those poor countries were doing something to help themselves (mining gold) the central bank for one of the most vociferous advocates for international welfare stabbed them in the back.

One can only imagine the relief that BoE head Gordon Brown felt Wednesday as the next to last auction approached. His three-year ordeal was about to be over. Yet, Brown was to suffer another humiliation before he could put his ill-fated auctions behind him.

Earlier in gold's trading day Wednesday, the price of gold approached $289, but by the time the auction was held, it collapsed, and the BoE received only $283.50. A couple of hours later, gold topped $288. The BoE had sold on the day's absolute low, and the $4.50 swing on 20 tons (643,000 ounces) cost the English people right at $2.9 million. Of course, England's loss was the buyers' gain, so someone went home happy. Next month, when the BoE holds its last fire sale, it will have dumped 415 tons of gold in less than three years.

The auction was oversubscribed only 1.4X, and the last auction, November 27, 2001, had bids for only 1.6X. So, it appears that interest in the BoE auctions is dwindling as they come to a close. The big gold buyers are lining up sources elsewhere.

Some stories are circulating that the BoE was set up Wednesday. Supposedly, rumors were spread that one buyer was going to take it all, causing other bidders to stay away. Then, the price of gold was hammered, and the successful bidders (not yet known) bought on the day's low. The close of the auctions does bring up interesting observations.

After the final sale next month, the BoE will hold some 300 tons of gold. In the world's hierarchy of gold owners, the once-mighty United Kingdom then will be tucked neatly between Venezuela (340 tons) and Lebanon (286.8 tons). The auctions will have dropped the UK from number nine to number 18.

Further, the BoE declared that the purpose of its gold sales was "to restructure its reserve holdings." Forty percent of the proceeds were to be invested in dollars, 40% in euros, and 20% in yen. In 1999, short-term U.S. debt instruments yielded better than 5%; today, T-bills pay less than 2%. Euro bonds do not pay much better, but funds sunk into yen are really sunk. Interest rates in Japan are right at zero. Despite changing circumstances, the BoE plowed straight ahead like a whipped work horse, its head down, blinders on.

What makes the BoE's intransigence so fascinating is that many new buyers are choosing gold because their banks want them to rollover CDs at less than 2%. These new investors see gold as the better choice. Yet, Gordon Brown and the Bank of England went ahead with their auctions in the face of collapsing interest rates. The people of England would do better to interview American gold investors when looking to replace Mr. Brown, a move that probably could not come too soon.

Another observation brought on by Wednesday's auction: Russia and China now hold more gold than the UK. Russian is #13 on the totem pole, and China #14. And, both counties continue to add to their gold positions.

Finally, we need to point out that several news articles have surfaced that again lay out the old, hackneyed arguments against gold: central bank selling, prices unable to go up for years, lack of investors interest, etc. "Gold is no longer a financial instrument," one article noted. Well, if gold is so undesirable, why did bidders pay the Bank of England $182,000,000 for 643,000 ounces Wednesday? Someone with deep pockets seems to like gold.

Bill Haynes

January 21, 2002

This article is from Monetary Digest, Certified Mint, Inc.'s precious metals newsletter. The author has been a precious metals dealer since 1973. He can be reached at bill@certifiedmint.com His primary Web site is www.certifiedmint.com