Wednesday, March 19, 2008

A wealth creator writes about gold

Lots of Tories criticise Gordon Brown's decision to sell the UK's gold reserves back in 1999. Iain Dale, for example, writes today that 'this cost the country more than Black Wednesday' (which Iain calls 'White Wednesday', presumably just like he would refer to the 'Winter of Harmony' in 1978/9).

A friend who works as a wealth creator e-mailed me about this:

'Leaving aside that we were selling as part of a G7 arrangement and every other major central bank was doing the same, compare it to the amount that the government lost as a result of selling nationalized industries at ludicrously low prices.

Lets just take BT. Sold for a little under £3bn, current market worth £16.3bn, market worth in 2000 at top of telecom bubble £80bn. You might as well say the thatcher government cost us £77bn on that one. That's just on one of the privatised industries!

Or, you might say if you were a Tory, it is fundamentally right for the state not to own companies. In the same way we can legitimately say we don't think it right or appropriate for a modern government to have billions of pounds of reserves held in a fundamentally useless metal which yields no interest rate and isn't even used to back the currency any more, when the money could be put to better and more productive use.

As for the issue of gold, clearly the Thatcher government should have sold all of our gold around late 1979 above $800. They then could have cunningly bought it back around $300 in 1984. Before selling at $500 in 1985. Brown could then have bought as low as $250 in 1999 and now be sitting on massive profits.

Or this could have be nonsense and the very volatility of the metal over the past 40 years might show HOLDING GOLD AS A FORM OF RESERVES IS STUPID. And government's trying to act as financial traders IS STUPID.

My favourite gold argument is as follows - 'We are going to get lots of inflation therefore you should buy gold as a hedge against inflation'.

People respond 'But gold hit a high over $800 in 1980 and is now around $1,000 - a record price - is it really going to go up much more'

To which the gold bug invariably responds ' yes, but if we inflation adjust the 1980, the price of gold in real terms (i.e 2008 dollars) was more like $2,100 - so it could easily double from here'.

Which surely proves gold is a rubbish hedge against inflation, if in real terms it is half the level it was 30 years ago because of inflation...


At 9:28 am , Anonymous Oranjepan said...

BT - privatised for £3bn, worth now £16.3bn.

Leaving aside the concept of selling at the top of the market (when the sale was creating one), with two decades' worth of consumer price indexed inflation factored in to the nominal price we could easily get to double or triple your calculation (taking the FTSE annual growth average would redouble or retriple any CPI-based sums).

You implicitly compound your basic mistake by making the assumption that as a nationalised monopoly it would have both the motivation and resources to modernise either it's products or services (that's without leaning on the taxpayer for an interest-free, non-repayable investment).

Finally, you have completely ignored the devolved advantage of bill reductions to all comsumers, with the increased fairness this involves, as well as the freedom to change to a supplier of choice with tailored services (which are of incalculable benefit/value).

All-in-all privatisation of BT has been a good deal to each and every single one of us. It wasn't just about profiteering by those with the capital and access to the market.

At 5:11 pm , Blogger Mat said...

love that "just" in the final sentence of the previous comment.

At 2:24 am , Blogger Giant Lizard said...

Interesting point oranjepan makes.

Pity though that the idea de-nationalisation has made BT provide a responsive or well priced service is, er, total bollocks.

Unless you take cable (not a phone service) you have to pay line rental to BT. How is that 'freedom to change' supplier?

If you're not connected to the phone exchange BT will charge £125 to connect you - even if you don't want to use their services.

And by the way, they'll insist you take a day off work so you can let them in.

Then they won't turn up.


Lastly, look at the phone and broadband market and you'll quickly notice that the pricing is pretty uniform no matter who you pay your cash to.

The reason we have a better service now isn't BT's privatisation. It's the fact almost 20 years of technological advance have gone past.

Oh, one more thing. I suspect the discussion about de-nationalised industries is intended to prompt realisation of how stupid the gold argument is, not suggest we should or shouldn't have sold off the family silver.

At 2:42 pm , Anonymous Oranjepan said...

points taken - not 'just', though any 'also' has to take into account the requirement to write sufficient controls into any legislation to prevent abuses and then give sufficient power to any watchdog to enforce them.

So that's either the implicit complacency or complicit corruption of the politicians which is to blame, or both.

At 9:30 pm , Anonymous Joe Halas said...


Just wanted to say thank you! Having had to listen to Tory clap-trap about 'Gordon's stupidity' it is so gratifying to learn (inevitably) that the truth is somewhat different.


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