Financial Times Exaggerates Central Bank Losses from Gold Sales

One of the lead stories in the Financial Times claims that the gold sales of the European central banks have cost them $40 bln over the past decade. The methodology exaggerates the loss. If you bought a stock at $30 and sold it at $90, but the stock went up to $120, did one lose $30? The Financial Times suggests you did.

The Bank of England and several eurozone central banks announced in 1999 their intentions to sell gold. They have proceeded to sell something on the magnitude of 3,800 metric tons for around $56 bln. The FT projects that the central banks earned about $12 bln, assuming they moved into bonds. However, it says because gold prices are higher today, the central banks are $40 bln poorer.

The report seems to play loose with the two distinct concepts. One is opportunity cost. Yes if the central banks would have held on to their gold, and valued it at market prices, which is not something that all central banks do, there is an opportunity cost.

The second concept is a loss. The provocative headline says "Decade of gold sales has cost Europe's central bank $40 bln." Within the story is says, "The biggest loser is the Swiss National Bank, which sold 1,550 metric tones over the decade and at today's gold prices is $19 bln poorer". The same logic finds the BOE is the "second biggest loser" as it is $5 bln poorer.

In addition to the confusion of opportunity cost and material loss, the FT argument also is flawed because it based on hindsight. It seems like what is called Monday morning quarterbacking. When the decisions were made in 1999, gold had spent more than a decade going no where, or rather in Aug 1999 gold had fallen to $251 an ounce. In Feb. 1996, the price of gold had put in a multi-year high near $420. Therefore based on the information set available to policy makers then, as opposed to the information a journalist would have in 2009, it might not be as silly as the report suggests.

Another point that we have made before and is worth repeating is that while the central banks have sold gold, the price of gold has indeed gone up. Yet many observers seem to take for granted that if and when central banks begin selling dollars that the dollar will fall. Looking at the performance of gold as a possible test case, it would seem that central banks are not only knowing (they too have an information set that is fundamentally incomplete, like private sector participants) and that the impact of their activity depends on a host of other considerations that cannot simply be deduced from first principles.

Comments

[DONE_SONZ:]

Maybe not poorer,but they shouldnt have sold either.

May 08 10:16 AM

[History Buf...:]

Central banks are not all knowing? Really?

You are right, Marc, hindsight is always 20/20.

Probably the most prominent whipping boy for the movement that the central banks "lost" money by selling gold too soon would be Gordon Brown, who was willing to let go of much of the UK's barbarous relic when it was going for about $250/ounce. I submit to you that he is not being blamed so much for that misstep as he is being blamed for the many other mistakes that were made on his watch.

Still, the media being what they are, it's a good sound bite.

May 08 10:21 AM

[GMiki1:]

Brown sold at the absolute bottom of the market when he was advised not to. Why? I'd really like to know. The premise here has a certain logic, but not really when it's the people's money you're discussing and not the decider's own. It's amazing what folks will do with someone else's money.

May 08 11:36 AM

[History Buf...:]

The key here is "other people's money". And that's why government is so lousy so often. If you don't have an economic interest in a positive outcome usually you can't be bothered to do anything productive.


On May 08 11:36 AM GMiki1 wrote:

> Brown sold at the absolute bottom of the market when he was advised
> not to. Why? I'd really like to know. The premise here has a certain
> logic, but not really when it's the people's money you're discussing
> and not the decider's own. It's amazing what folks will do with someone
> else's money.

May 08 01:25 PM

[KBowen7736:]

This guy needs to change out whats in the pipe he is smoking. Attempting to correlate the rise in gold price concurrent to European sales with a possible rise in the dollar value when the world decides to dump the dollar is idiocy. Where do they pull these sagesfrom?

May 09 08:54 AM

[Vuke:]

The world would be a little better place if Cental Banks eased up on their fantasies of unlimited currency growth backed only by hot air. There may be one born every minute but to assume all six billion of us are suckers is pushing it.

It is surely "a first priciple" that the coins jiggling in one's pocket should have some intrinsic value if we expect others to take them in an exchange for goods or services.

There is no shortage of gold, silver, copper, zinc, nickel or other valuables from which money could be constructed with paper convertible to such. The desire to produce it for nothing must be based on greed and belief that 3% annual inflation is somehow good for the masses.

The past decades have been driven by their experiment, for which we are now paying the full cost with lives ruined, fortunes unjustly earned and savings bled to near nothing.

A good hanging or two may be order.

May 09 10:46 AM

[bozzy:]

Opportunity cost is still a cost, and in this case I would say it is also the Relevant cost from the POV of the FT article and also the British Public. Brown was a self-procpaimed and widely lauded genius chancellor for many years, but who in fact had only one claim to fame: he did not take the rich inheritance the Tories left behind and piss it up the wall like so many of his labour predecessors. However, this does not excuse the consistently poor judgement he has displayed, nor does it make his gold sale sensible.

The relevant cost is always under review, and no different for Brown. His decision to sell such a large proportion of the UK holding was a high order blunder.

May 09 11:33 AM

[altaman:]

Brown couldn't wait to get is grubby, socialist paws on the cash so he could blow more of his nation's wealth on the peoples' behalf. At least his efforts helped to put England back on the road to long-term prosperity. ;)

May 09 01:24 PM

[AndrewBaker:]

Politicians generally are not good with other people's (ie: tax payer's) money, and selling gold at the wrong time, particularly that sold at the UK's then chancellor's behest, was just another bad political financial decision.

Funnily enough, politicians, those in the UK anyway, seem to be pretty good at looking after their own money, If you haven't heard about it yet, Google or otherwise read about the way the UK politicians have been and are are milking their tax-payers through bogus, dishonourable and plain dishonest "expenses" claims.

Once upon a time, people went into public service after they had lead a good life themselves, and wanted to put something back. Today, they treat politics as an easy way to gain power, money and fame; and don't give a damn about the people on whose backs they ride, and dig their stirrups into when they want more.

Today's leaders are robber barrons, at the very best.

May 09 04:47 PM

[capt Brian:]

Good article. For those who can read properly, [for some reason he {the author of this article} and no one else speaks plainly].

I guess what he is trying to say is the banks are hiding something from their public. Gee, would the banks do that? Nah h h hh

why would they?

everything is fine.

god help America.

May 10 12:21 AM

[H. T. Love:]

On May 09 10:46 AM Vuke wrote:

><snip>

> The desire to produce it for nothing must be based on greed
> and belief that 3% annual inflation is somehow good for the
> masses.

Uhh, for whom? It's good for the select few and that's all that matters. Google for "Federal Reserve" and/or "Rothchild's" and view a few of the well-done videos and articles about the history of central banking. I'm not a conspiracy guy, but ... if it walks like a duck, quacks like one, ...

>
>
> The past decades have been driven by their experiment, for which
> we are now paying the full cost with lives ruined, fortunes unjustly
> earned and savings bled to near nothing.

It is not an experiment. It is a tried and true proven recipe for concentration of wealth and maintenance or increase of power.
If I recall correctly, a couple of our early experiments in abolishing central banking produced some really good results for the country and its people. The results of the google include some very good statistices on this.

Please remember that the "Federal Reserve" is a privately-held institution.

>
> A good hanging or two may be order.

A master of understatement. :-)

HardToLove

May 10 07:51 AM