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Bank of England Gold Auctions



HM Treasury today announced a restructuring of the UK's reserve holdings to achieve a better balance in the portfolio by increasing the proportion held in currency. This will involve a programme of auctions of gold from the Exchange Equalisation Account, which holds the UK's official reserves of foreign currency and gold, with the proceeds being invested instead in foreign currency assets and retained in the reserves.

It is intended that 125 tonnes of gold (3% of the total reserves) will be offered for sale in a series of five auctions in the financial year 1999/2000, conducted by the Bank of England on HM Treasury's behalf. The first of these auctions will take place on 6 July 1999: thereafter it is envisaged that they will be held every other calendar month, i.e. in September and November 1999 and in January and March 2000. Soon after each auction, the date and details of the next auction will be announced.

It is planned that around 25 tonnes (or 800,000 fine troy ounces) of gold will be offered at each of the five auctions, though the amount may be varied in the light of experience. The gold will take the form of London Good Delivery bars, each weighing about 400 fine troy ounces and located at the Bank of England in London. To encourage the widest possible interest, the Bank will consider bids for a minimum of 400 ounces and multiples thereof, at prices per ounce expressed in US dollars and cents. Successful bidders will be allotted gold in whole bars as near as possible in weight to the quantity of the bid accepted by the Bank.

The first auction will be conducted on a single, or uniform, price basis. Under this format, the bidding process will be competitive: bars will be allotted to the highest bidders, but all successful bidders will pay a single price that is equal to the lowest accepted bid. It is intended that subsequent auctions will also follow this single price format, but the pricing method will be subject to review in the light of experience.

In the interests of efficiency and security in the bidding process, it is the Bank's current intention that the circle of eligible bidders will comprise members of the London Bullion Market Association (LBMA), including both market makers and ordinary members, and central banks and monetary institutions holding gold accounts at the Bank of England. The auction process will thus be open to the biggest and most active UK and foreign institutions in the international bullion market, of which London is the major centre. LBMA members also represent a broad international customer base, thereby giving other interested parties access to the auctions through the eligible bidders.

The result of the auction will be announced, and successful bidders will be informed of their precise bar allocation and the payment due, as quickly as practicable after the auction has closed. Payment will be in US dollars to the Bank of England's account at the Federal Reserve Bank of New York two business days after the auction has closed. Once the Bank of England has received confirmation of receipt of cleared funds in New York, its preferred approach will be to credit the allotted gold bars to gold accounts held with the Bank of England. Physical collection from the Bank of England in London will also be possible.

In the next few days, the Bank will initiate consultations with LBMA members on technical aspects of the auction process.

An Information Memorandum will be published in early June. This will set out the terms and conditions of the auction programme. At the same time, an auction announcement notice will provide full details of the first auction, including the bidding format, payment and settlement instructions, etc.

Notes for Editors
At the end of April 1999, the UK's official holdings of gold totalled 715 tonnes, or nearly 23 million fine troy ounces, with a market value of about $6.5 bn. These form part of the UK's official foreign exchange and gold reserves, which at end-April stood at nearly $37 bn including gold at its full market valuation. As indicated, the gold to be auctioned will be in London Good Delivery bars, located at the Bank of England. The initial programme of auctions will involve the sale of less than a fifth of the UK's official holdings of gold. The proceeds of the sales will be added to the foreign currency reserves.

As indicated by H M Treasury, over the medium term it is planning to reduce its gold holdings to around 300 tonnes. Detailed plans for auctions in 2000-01 and later years will be announced nearer the time, but arrangements are likely to be similar to those announced today.

The Bank of England has for many years been a supplier on demand of sovereign and half sovereign coins in wholesale amounts to bullion market members. This practice will continue.

"London Good Delivery" represents the standard measure of quality of gold bullion used in physical transactions in the London market and is the accepted standard worldwide. A London Good Delivery bar must be at least 995 parts per 1,000 pure gold, with 999.9 being the highest possible quality. The minimum weight is 350 fine ounces and the maximum is 430 fine ounces. The weight of each bar is expressed in troy ounces in multiples of 0.025, complying with the procedures established by the LBMA. Each bar must bear a serial number and the stamp, or chop, of an approved refiner as designated in the London Good Delivery List of acceptable smelters and assayers.

The London Bullion Market Association was formed in 1987 in close consultation with the Bank of England. It sets standards and processes applications to the London Good Delivery list, and represents the interests of a broadly-based membership active in bullion markets in London and worldwide. It comprises 12 market-making members and 50 ordinary members. These originate from 14 different countries, and have trading activities in considerably more, providing links to the London market for a broad international customer base of gold producers, fabricators, investors and consumers. The London bullion market currently operates under the rules set out in the London Code of Conduct originally developed jointly by the Bank of England and wholesale market associations including the LBMA, and now administered by the FSA.

For more information, visit the Bank of England website.

(HM Treasury News Release--7 May 1999) RESTRUCTURING UK RESERVE HOLDINGS

The Treasury today announced a restructuring of the UK's reserve holdings to achieve a better balance in the portfolio by increasing the proportion held in currency. This will involve a programme of auctions of gold from the Exchange Equalisation Account, which holds the UK's official reserves of foreign currency and gold, with the proceeds being invested instead in foreign currency assets and retained in the reserves.

The Treasury intends to sell 125 tonnes of gold, 3 per cent of the total reserves, during 1999-2000, with the Bank of England conducting five auctions on the Treasury's behalf. Auctions will be held every other month starting in July.

$6.5bn of the UK's reserves is held in gold (715 tonnes). Over the medium term the Treasury is planning to reduce its gold holdings to around 300 tonnes. Detailed plans for auctions in 2000-01 and later years will be announced nearer the time, but arrangements are likely to be similar to those announced today.

Notes For Editors
1. The announcement of the intention to restructure the reserves was made in answer to a Parliamentary Question from Ivor Caplin (Hove).

2. The UK gross reserves total $37bn (valued at market prices), but its foreign currency liabilities amount to $22bn. The $6.5bn held in gold therefore makes up almost half of the unhedged or 'net' reserves.

3. UK sales of 125 tonnes compare to global annual mining output of over 2,500 tonnes (according to Gold Fields Mineral Services) and total world holding of gold of over 100,000 tonnes (according to the IMF) of which over half (around 60,000 tonnes) is held in private hands.

4. There are just over 32,150 troy ounces to each metric tonne of gold. 125 tonnes is therefore approximately four million ounces.

5. A separate Bank of England press release provides more detail of the management of the auction programme.

For more information, visit the Treasury website.

(World Gold Council - London Press Release--7 May 1999) UK TREASURY GOLD SALES

The UK Treasury's intention of selling 415 tonnes of its gold reserves over what it calls the "medium term," thereby reducing its holdings to 300 tonnes (from 715 tonnes) has had an immediately damaging effect on the gold price, which fell by nearly $7.50 to $281.50 an ounce in early trading in London.

The UK Treasury's current holding of 715 tonnes of gold represents 16.7 per cent of the UK's official reserves. By selling an initial 125 tonnes - in five tranches in the current financial year - this proportion drops to 14 per cent, below the international average of 18 per cent. The total sale of 415 tonnes will bring UK official gold reserves down to about 7 per cent.

The official line of the Bank of England, which will manage the gold auctions, is that this planned sale is no more than "a prudent restructuring of reserve holdings." However, it acknowledges that this is a political decision by the Treasury. Some commentators have already suggested that this move is a precursor to the UK joining the European Monetary Union and the European Central Bank. If Britain becomes part of the ECB its gold or foreign currency reserves will effectively be frozen as, under ECB guidelines, any gold sales by individual central banks will be subject to control by the ECB. Thus in some sense this move appears to be pre-empting the promised referendum for UK citizens about whether or not they wish to join the Euro.

While the Treasury should be applauded for giving a detailed explanation of its intentions - and thus has done much to eliminate the scope for rumour-mongering - it is nevertheless inevitable that this will be interpreted by the international bullion market as further evidence of official disenchantment with gold as a reserve asset.

The announcement by the Treasury appears to be timed to get in early, before other planned official sales take place. The Swiss National Bank is in the process of a lengthy legislative procedure which might enable it to sell 1,300 of its 2,590 tonnes of reserves, while the IMF is in the middle of protracted discussions to sell as much as 311 tonnes of its own reserves. The irony is that Gordon Brown, the UK's Chancellor of the Exchequer, is simultaneously leading the charge on behalf of IMF gold sales - purportedly to assist debt relief in poor countries - while damaging the price by proposing to sell some of the UK's reserves in advance.

The damaging reverberations of such a symbolically-charged action by the Treasury will be felt for many months to come, not only in the UK but in a number of the 41 so-called Heavily Indebted Poor countries in Africa and elsewhere. In 9 of the HIPC countries gold accounts for 5%-37% of exports; another 5 of them have important gold-mining developments underway. With each $1 drop in the price of an ounce of gold, these developing countries will suffer real economic damage. The drop in the price of gold on Friday as a result of the UK Treasury's announcement immediately wiped off $150 million from the annual export earnings of Sub-Saharan Africa.

The volume and timing of the planned sales - an initial 125 tonnes in five auctions in the financial year 1999/2000, starting on 6 July 1999, with the rest spread out over an undefined "medium term" - may be manageable. Indeed, annual global demand for gold is currently running about 1,000 tonnes over mine production. Net annual sales from the official sector have been averaging 315 tonnes over the past decade. The sale of 125 tonnes by the UK over two years needs to be seen in perspective, particularly in the context of there being no major official sector gold sales in 1998 or in the first half of this year.

The decision to sell gold and hold official UK reserves overwhelmingly in foreign currencies betrays a failure to consider the reasons why gold has always been considered an important defensive asset in the long term.


* The UK had 1,432 tonnes of gold in 1948. Between 1958-65 it fluctuated between 2,000-2,500 tonnes. The last time the Treasury sold any gold from its reserves was during 1966-72 when 1,356 tonnes were sold. Reserves were boosted again in the late 1970s and have remained stable at about 715 tonnes since then.

For more information, visit the World Gold Council website.

[Editor Note: The final program of UK sales, commencing May 2001, was reduced in size from 25 tonnes per auction to 20 tonnes. See below.]


(HM Treasury News Release--7 March 2001) UK GOLD SALES 2001-02

The Treasury announces in the 2001-02 Debt and Reserves Management Report, published today as part of the Budget 2001 process, that it plans to complete the programme of gold sales, announced in May 1999, during the coming financial year. It plans to sell 120 tonnes of gold from the UK reserves of gold and foreign currencies during 2001-02, through Bank of England auctions as in previous years.  There will be six auctions during 2001-02, starting in May 2001, each of 20 tonnes.

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