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The British Diet: Hold a Gold Auction & Lose a Few Pounds

(January 16, 2002) This morning’s next-to-last auction of 20 tons of gold by the Bank of England yielded a meager $283.50 per troy ounce. After gold traded overnight in Asia near $290, and fixed in the morning at $287.95, the Brits took home $4.45 below the current spot price. A clinic on how not to flog your redundant material….

“Shocking, isn’t it? It’s incredibly disappointing…just disappointing would be a huge understatement…”

-Reuters News quotes a gold trader this morning after results of the Bank of England’s absolutely worst gold auction ever was announced.

We have written here before about the Estate Sale of the British Empire, our tongue-in-cheek name for the Bank of England’s every-other month auctions of surplus gold that began in July of 1999. But today took the cake: it was only 1.4 times oversubscribed, which means they barely had enough bidders to take the whole 20 tons, and the discount to current markets was the sharpest yet. What happened?

The cynical view would be that, since this was the next to last opportunity for traders to abuse the Bank of England by bidding down their gold, they had to really kill them this time. Well, kill them they did. The action started Tuesday afternoon and evening, with a rumor that a large buyer intended to come to the auction and buy it all. Prices ran up overnight in panic over the rumor. The morning fix today further reflected this anticipation…

And then they held the auction. Since most of the potential buyers had bought in a panic yesterday, there was no one left to bid today, and the bottom fell out.

Never before in the history of these auctions has 20 tons of gold been sold off at such a discount to current gold spot prices. Since May of 1999, Britain has been holding six gold auctions a year, and has demonstrated to the world that pre-announced, quantity sales of gold are absolutely the worst possible way to rid yourself of a surplus commodity. The procedure has become a joke in the gold business, and traders have made small fortunes taking advantage of Britain’s naïve method of offloading gold.

Leonard Kaplan, of Prospector Asset Management, said it best in his newsletter of 1/14/02:

“I expect a bit of relief rally as this auction fades into history and, once again, the Brits sell their gold too cheaply. In order to cultivate better relations with the Bank of England, I would recommend that all major bullion houses send flowers as symbols of their thanks for their generous donations over the years.”

Kaplan was right, of course. Here’s how it played out today:

Before the noontime auction, the London morning fix came in at $287.95, reflecting the overnight interest in Asia. Around lunchtime, the Bank of England gold auction brought $4.45 per ounce less than that figure, allowing the British treasure to be bought on the cheap. Later today, the New York gold close of $287.60 topped off this perfect “sandwich.” The unappetizing content of that sandwich for the British Treasury was an interday realization some $2,748,910.00 short of the average market prices established before and after the auction itself.

Here's a rule, Britannia: Ye are being made sport of.

In contrast, over the past few years countries such as Switzerland, Canada, and Australia have quietly parceled out surplus gold holdings into the gold market at reasonable prices, avoiding the pounding that Britain has taken at their auctions. By playing the markets, keeping their sales quiet, and cost-averaging, these other countries have sold off hundreds if not thousands of tons of gold over the past few years without even causing a blip in the price. Remember, demand for gold is strong, and has exceeded the supply of mining and scrap gold for four years now. It seems that only the Bank of England doesn’t get it.

But gold markets are funny things, and it takes all kinds of buyers and sellers participating to keep things rolling. China recently announced that it had increased its gold reserves by some 30% during 2001, and is now holding over 500 tons of gold. Japanese citizens’ purchase of gold bullion doubled in 2001, although admittedly from a very low level of sales in 2000. Investor demand in the US increased also in 2001, but is still at a level that is dwarfed many times over by the amounts of purchases of US equities and mutual funds.

Gold still has a ways to go before it regains its lost respect and reputation.

In an article about gold and gold investing by Thom Calendra of CBS, John Roque of Arnold & Bleichroeder in New York seemed at first to have it in for gold when he was quoted as saying that gold is:

“…the most unloved, despised, laughed at, repulsive and flesh-crawling financial instrument known to mankind.”

He went on to predict that it would reach $340 this year.


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