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Bank Of England (Gold Sales)

Volume 408: debated on Tuesday 7 October 2003

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1.

If he will make a statement on his policy of instructing the Bank of England to sell gold and invest the proceeds in particular currencies.[124642]

The decision to sell gold reserves was taken to reduce the risk of over-exposure to one asset in our foreign exchange reserves. That was successfully achieved, as measured by value at risk, and the gold sales delivered a 30 per cent. reduction in risk.

Does not the Chancellor accept that it was a major error of judgment to force the Bank of England to sell its gold when the price was an almost all-time low? Why has he not been willing to admit to the precise consequences when reputable organisations advised me yesterday that, taking everything into account, the actual loss—they say that it is very easy to calculate—was about £400 million, which is about £32for every family in Britain? Although I accept that the Chancellor of the Exchequer is a very wise person, when he makes a mistake, should he not admit it and tell us the consequences?

I disagree entirely with the hon. Gentleman. First, every country has been diversifying from gold. Switzerland sold 1,300 tonnes; Belgium sold 1,000 tonnes. We have sold 395 tonnes. Almost all our European partners, and Australia and Canada, have far less in gold than we do. It was the right decision for the country, and it was the right decision for the management of risk. The hon. Gentleman will be interested to know that, of the new assets that we bought, the ones that have gone up most in value over the past few years have been those that we bought in the euro. It is quite interesting that, when the Conservative party wants to present itself as pro-European, we start the day with the hon. Gentleman leading the fight for the Conservatives.

I do not doubt the Chancellor, but what is the basis of the judgment that there has been a 30 per cent. reduction in risk? How is that arrived at?

I have with me the National Audit Office report, and the hon. Member for Rochford and Southend, East (Sir Teddy Taylor) was also wrong to imply that that may not have been the Bank of England's advice to us. The Bank of England supported our decision. The hon. Gentleman will be interested to know that the NAO made a study of this. The study is not from a PhD thesis on the internet. [HON. MEMBERS: "Oh."] Again, if I can repeat to the House that, reading the study in its quite detailed complexity, there is no question of it ever being sexed up. The document itself makes it clear that this was a value-for-money exercise. That was the sole reason why it was done. It diversifies the risk to us, and already, as I have indicated to the hon. Gentleman, the rise in the value of the euro shows that it was a worthwhile exercise.

Is the Chancellor aware that he is wrong when he says that all the countries are selling gold? The biggest holders of gold, none of which have sold, are the United States, France, Germany and Italy. China is a big buyer of gold, and it has been for some months. Will Britain press for a renewal of the Washington agreement on gold of September 1999, which is due for renewal next year and which he played a part in bringing about?

It is exactly because we have the Washington agreement that other countries did not sell. We had to have the Washington agreement.

Yes, but they did not sell in the past two years. It is precisely because there was concern about the amount of gold being sold around the world, depressing the gold price at the time, that we got an agreement from all the countries. Our gold sales went ahead, other gold sales went ahead, and the countries the hon. Gentleman mentions agreed that they would not sell gold at that time because of the Washington agreement. Of course, we will continue to look at this, but he cannot deny the fact that, in many cases, the countries that have sold gold have sold far more gold that we have and, at the same time, most of the countries that I have mentioned, including Australia and Canada, outside the European Union have far less of their assets in gold. As for value for money, the mistake was made by the previous Conservative Government not selling gold when the gold price was even higher.

To what extent did my right hon. Friend need to coerce the Bank of England into taking that decision; or did it, in fact, agree with him that that was the correct policy to pursue given the current prevailing economic circumstances?

The decision had the support of the Governor of the Bank of England. The decision was made in a transparent way, with the auctions of gold, for which we have been praised because that is a far more open process. The decision has been gone into in a huge amount of detail in the NAO report, and the results of that show that we have achieved value for money, that we are getting a satisfactory return on our reserves and that we are protecting the position of our reserves, while reducing risk. I should have thought that the Opposition parties would support what we did.