A Cautionary Tale: Britain's Gold Selling Blunder

It looks like Great Britain sold its gold too soon. 

And are some lessons to be learned from this British experiment with reserve diversification. 

Between 1999 and 2001, the British government sold about 395 tonnes of gold in a bid to diversify the UK’s reserves.   

The sale generated around $3.5 billion at the time. That comes to around $6.4 billion in 2024 dollars. 

Had the Brits held on to their gold and sold it at today’s price of nearly $2,700, it would have generated around $37.6 billion.

According to a report by GB News, the sale today could have filled the current £22billion “black hole” in public finances.

Why Did the UK Sell Its Gold?

Why did the British government offload nearly half of its gold reserves?

At the time, gold wasn’t performing particularly well. The market was volatile. When the government announced the gold auction in May 1999, the yellow metal was at a 20-year low.   

IEA Economics Fellow Julian Jessop told GB News that the sale made sense at the time “because gold had performed poorly as an investment for many years.” He also argued that the launch of the euro provided the opportunity to diversify UK reserves into a new currency expected to rival the dollar. Furthermore, “the proceeds from the gold sales were reinvested in assets that paid interest, generating some additional income.”

As it turns out, between 1999 and 2024, the price of gold increased by an average of 8 percent annually.

Oops!

The Lesson

Jessop’s last point underscores a typical mindset in the investing world. Because gold isn’t an interest-bearing asset, investors often shun the yellow metal in a higher interest rate environment. We’re seeing that today every time the Federal Reserve hints it might hold rates higher for longer.

Investors forget they are always battling inflation. Jessop conceded that any additional income generated by these assets paled in comparison to the increase in the price of gold since the sale, but he still defended the move, saying, “The government should not really be in the business of speculating on commodity markets."

However, his argument for investing in interest-bearing assets rests purely on speculation. As we’ve seen since the 2008 financial crisis, central banks tend to suppress interest rates for the stimulative (and inflationary) effect. You may or may not get a higher interest rate environment. In reality, interest rate policy is volatile and subject to the whims of politically connected bankers. 

And as we're seeing today with the rates on the long end of the yield curve increasing even with Fed rate cuts, the bankers don't have as much control of the market as they would have you believe. 

Even when rates seem high, real interest rates (the stated rate you see on the news adjusted for price inflation) are often much lower than advertised rates due to inflation. We saw long stretches of negative real rates between 2008 and 2022.

On the other hand, gold has historically served as an inflation hedge in the long term. Owning gold may not be as sexy as chasing yield, but it protects wealth over time – the entire point of reserve assets. This is precisely why so many central banks today are buying gold. 

Not all British officials defended the sale.  Former Chancellor Kwasi Kwarteng told GB News, "The sale of the gold at rock bottom prices was a huge blunder.”

"We should never have sold it and if we hadn’t, we should still keep it regardless."

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