Brown Bottom
Encyclopedia
The sale of UK gold reserves was a policy pursued by HM Treasury
over the period between 1999 and 2002, when gold
prices were at their lowest in 20 years, following an extended bear market. The period itself has been dubbed by some commentators as the Brown Bottom or Brown's Bottom.
The period takes its name from Gordon Brown
, the then UK Chancellor of the Exchequer
(who later became Prime Minister
), who decided to sell approximately half of the UK's gold reserves in a series of auctions. At the time, the UK's gold reserves were worth about US$6.5 billion, accounting for about half of the UK's US$13 billion foreign currency net reserves.
The UK government's intention to sell gold and reinvest the proceeds in foreign currency deposits, including euro
s, was announced on 7 May 1999, when the price of gold stood at US$282.40 per ounce
. The official stated reason for this sale was to diversify the assets of the UK's reserves away from gold, which was deemed to be too volatile
. The gold sales funded a like-for-like purchase of financial instruments in different currencies. Studies performed by HM Treasury
had shown that the overall volatility of the UK's reserves could be reduced by 20% from the sale.
The advance notice of the substantial sales drove the price of gold down by 10% by the time of the first auction on 6 July 1999. With many gold traders shorting
, gold reached a low point of US$252.80 on 20 July. The UK eventually sold about 395 ton
s of gold over 17 auctions from July 1999 to March 2002, at an average price of about US$275 per ounce, raising approximately US$3.5 billion. By 2011, that quantity of gold would be worth over $19 billion.
To deal with this and other prospective sales of gold reserves, a consortium of central banks - including the European Central Bank
and the Bank of England
- were pushed to sign the Washington Agreement on Gold
in September 1999, limiting gold sales to 400 tonnes per year for 5 years. This triggered a sharp rise in the price of gold, from around US$260 per ounce to around $330 per ounce in two weeks, before the price fell away again into 2000 and early 2001. The Central Bank Gold Agreement was renewed in 2004 and 2009.
Gold prices remained relatively low until 2001, when the price began consistently rising in a protracted bull market. By 2007, the price of gold had reached US$675, and the loss to the UK taxpayer was estimated at more than £2 billion, as the Euro
s bought with the proceeds had also risen in value. The gold price briefly passed US$1,000 per ounce in March 2008, before reaching all-time highs of $1,043.77 on 6 October 2009 and $1,048.40 on 7 October 2009, by which time the loss to the UK taxpayer was approximately £4 billion. Gold prices continued to rise, passing US$1,100 per ounce in early November 2009.
The decision to sell gold at the low point in the price cycle has been likened to the mistakes in 1992 that led to Black Wednesday
, when the UK was forced to withdraw from the European Exchange Rate Mechanism
, which HM Treasury
has estimated cost the UK taxpayer around £3.3 billion.
As at the 10th August 2011 the price of gold was $1749 per ounce, the difference in price making the loss in value $18 billion or £13 billion.
HM Treasury
HM Treasury, in full Her Majesty's Treasury, informally The Treasury, is the United Kingdom government department responsible for developing and executing the British government's public finance policy and economic policy...
over the period between 1999 and 2002, when gold
Gold
Gold is a chemical element with the symbol Au and an atomic number of 79. Gold is a dense, soft, shiny, malleable and ductile metal. Pure gold has a bright yellow color and luster traditionally considered attractive, which it maintains without oxidizing in air or water. Chemically, gold is a...
prices were at their lowest in 20 years, following an extended bear market. The period itself has been dubbed by some commentators as the Brown Bottom or Brown's Bottom.
The period takes its name from Gordon Brown
Gordon Brown
James Gordon Brown is a British Labour Party politician who was the Prime Minister of the United Kingdom and Leader of the Labour Party from 2007 until 2010. He previously served as Chancellor of the Exchequer in the Labour Government from 1997 to 2007...
, the then UK Chancellor of the Exchequer
Chancellor of the Exchequer
The Chancellor of the Exchequer is the title held by the British Cabinet minister who is responsible for all economic and financial matters. Often simply called the Chancellor, the office-holder controls HM Treasury and plays a role akin to the posts of Minister of Finance or Secretary of the...
(who later became Prime Minister
Prime Minister of the United Kingdom
The Prime Minister of the United Kingdom of Great Britain and Northern Ireland is the Head of Her Majesty's Government in the United Kingdom. The Prime Minister and Cabinet are collectively accountable for their policies and actions to the Sovereign, to Parliament, to their political party and...
), who decided to sell approximately half of the UK's gold reserves in a series of auctions. At the time, the UK's gold reserves were worth about US$6.5 billion, accounting for about half of the UK's US$13 billion foreign currency net reserves.
The UK government's intention to sell gold and reinvest the proceeds in foreign currency deposits, including euro
Euro
The euro is the official currency of the eurozone: 17 of the 27 member states of the European Union. It is also the currency used by the Institutions of the European Union. The eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,...
s, was announced on 7 May 1999, when the price of gold stood at US$282.40 per ounce
Troy ounce
The troy ounce is a unit of imperial measure. In the present day it is most commonly used to gauge the weight of precious metals. One troy ounce is nowadays defined as exactly 0.0311034768 kg = 31.1034768 g. There are approximately 32.1507466 troy oz in 1 kg...
. The official stated reason for this sale was to diversify the assets of the UK's reserves away from gold, which was deemed to be too volatile
Volatility (finance)
In finance, volatility is a measure for variation of price of a financial instrument over time. Historic volatility is derived from time series of past market prices...
. The gold sales funded a like-for-like purchase of financial instruments in different currencies. Studies performed by HM Treasury
HM Treasury
HM Treasury, in full Her Majesty's Treasury, informally The Treasury, is the United Kingdom government department responsible for developing and executing the British government's public finance policy and economic policy...
had shown that the overall volatility of the UK's reserves could be reduced by 20% from the sale.
The advance notice of the substantial sales drove the price of gold down by 10% by the time of the first auction on 6 July 1999. With many gold traders shorting
Short selling
In finance, short selling is the practice of selling assets, usually securities, that have been borrowed from a third party with the intention of buying identical assets back at a later date to return to that third party...
, gold reached a low point of US$252.80 on 20 July. The UK eventually sold about 395 ton
Ton
The ton is a unit of measure. It has a long history and has acquired a number of meanings and uses over the years. It is used principally as a unit of weight, and as a unit of volume. It can also be used as a measure of energy, for truck classification, or as a colloquial term.It is derived from...
s of gold over 17 auctions from July 1999 to March 2002, at an average price of about US$275 per ounce, raising approximately US$3.5 billion. By 2011, that quantity of gold would be worth over $19 billion.
To deal with this and other prospective sales of gold reserves, a consortium of central banks - including the European Central Bank
European Central Bank
The European Central Bank is the institution of the European Union that administers the monetary policy of the 17 EU Eurozone member states. It is thus one of the world's most important central banks. The bank was established by the Treaty of Amsterdam in 1998, and is headquartered in Frankfurt,...
and the Bank of England
Bank of England
The Bank of England is the central bank of the United Kingdom and the model on which most modern central banks have been based. Established in 1694, it is the second oldest central bank in the world...
- were pushed to sign the Washington Agreement on Gold
Washington Agreement on Gold
The Washington Agreement on Gold was signed of 26 September 1999 in Washington, D.C. during the International Monetary Fund annual meeting, and the US Secretary of the Treasury, Lawrence Summers, and the Chairman of the Federal Reserve, Alan Greenspan, were present.-Scope:"Under the agreement, the...
in September 1999, limiting gold sales to 400 tonnes per year for 5 years. This triggered a sharp rise in the price of gold, from around US$260 per ounce to around $330 per ounce in two weeks, before the price fell away again into 2000 and early 2001. The Central Bank Gold Agreement was renewed in 2004 and 2009.
Gold prices remained relatively low until 2001, when the price began consistently rising in a protracted bull market. By 2007, the price of gold had reached US$675, and the loss to the UK taxpayer was estimated at more than £2 billion, as the Euro
Euro
The euro is the official currency of the eurozone: 17 of the 27 member states of the European Union. It is also the currency used by the Institutions of the European Union. The eurozone consists of Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg,...
s bought with the proceeds had also risen in value. The gold price briefly passed US$1,000 per ounce in March 2008, before reaching all-time highs of $1,043.77 on 6 October 2009 and $1,048.40 on 7 October 2009, by which time the loss to the UK taxpayer was approximately £4 billion. Gold prices continued to rise, passing US$1,100 per ounce in early November 2009.
The decision to sell gold at the low point in the price cycle has been likened to the mistakes in 1992 that led to Black Wednesday
Black Wednesday
In politics and economics, Black Wednesday refers to the events of 16 September 1992 when the British Conservative government was forced to withdraw the pound sterling from the European Exchange Rate Mechanism after they were unable to keep it above its agreed lower limit...
, when the UK was forced to withdraw from the European Exchange Rate Mechanism
European Exchange Rate Mechanism
The European Exchange Rate Mechanism, ERM, was a system introduced by the European Community in March 1979, as part of the European Monetary System , to reduce exchange rate variability and achieve monetary stability in Europe, in preparation for Economic and Monetary Union and the introduction of...
, which HM Treasury
HM Treasury
HM Treasury, in full Her Majesty's Treasury, informally The Treasury, is the United Kingdom government department responsible for developing and executing the British government's public finance policy and economic policy...
has estimated cost the UK taxpayer around £3.3 billion.
As at the 10th August 2011 the price of gold was $1749 per ounce, the difference in price making the loss in value $18 billion or £13 billion.