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Sir Peter Tapsell: That is perfectly true, but the holdings of gold by central banks are only 6 per cent. lower now than they were 20 years ago. Other central banks, such as those of Russia and China, have been buying gold. It is perfectly true that the amount of gold that the Bank of England is selling is relatively small, but the psychological impact on the market is disproportionate.

The Bank of England was the bank that set the lead. Together with Rothschilds and Mocatta, it has always been at the centre of the world gold market ever since 1717. When the Bank of England says that it is selling gold, the tonnage that it is selling is less significant than the psychological impact of that on the rest of the world.

It is true that five countries--Australia, Canada, Argentina, Belgium and the Netherlands--have each sold more than 100 tonnes of gold in recent years, but in no case have those countries done so to diversify their reserves or to increase the technical efficiency of their management. They have all had other reasons.

It would take far too long for me to go into detail about the position in each country, but briefly, Australia sold because there was a mineral price slump in the world at the time and it had an economic crisis. In any case, Australia has very large quantities of gold underground, not yet dug up, so it does not have to worry too much about its gold reserves above ground.

Canada, which also has very large quantities of gold underground, sold in preparation for joining the North Atlantic Free Trade Agreement at a time when its currency was under pressure. Argentina has a currency board-type arrangement, which is quite different from a central bank, and is in effect part of the dollar area, so the considerations about gold that would be important to other central banks do not apply. Belgium sold in order to satisfy the debt:GDP ratio criteria in the Maastricht treaty.

The Netherlands is widely believed to be concerned about the possibility that the euro may collapse entirely. It was interesting that the new president of the European central bank, who is a distinguished former governor of

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the Dutch central bank, went so far as to say publicly the other day that he thought, and had so advised, that the euro was introduced two years too early. The Dutch, who have traditionally run a strong and successful currency since the war, are extremely concerned about the euro. It is said that they have been trying to build up foreign reserves outside the euro, in case the euro collapses.

I shall deal now with the question why central banks should hold gold. I hope that the Minister will reply particularly to these points. It is not just a few of us specialists in the House who are interested. I assure her that the markets generally are extremely interested in the subject. I have never received so many messages from total strangers as I have in recent days, since the title of the debate appeared on the Order Paper. The financial press is also very interested. It is time that the Government explained in detail the reasons for their policy.

Why do central banks hold gold? First, as I said to my hon. Friend the Member for Ludlow, because it is no one else's liability. If one invests in the bonds, paper and Treasury bills of other countries, one can suddenly find that one's asset has greatly diminished.

A taxi driver said to me two days after the Government's announcement, "Why are we selling our gold? I don't want to sell my gold and be given toilet paper money in return." That is sound economics. The man in the street may not have read his Keynes, but he has a good grasp of the realities of economics.

If, as the Bank of England proposes to do, it puts 40 per cent. into dollars, 40 per cent. into euros and20 per cent. into yen as a result of the sale of the gold, it will be speculating. We have seen a tremendous collapse in the yen, and the American dollar has gone up and gone down periodically, so the Bank of England is, in effect, playing the market.

To return to an earlier intervention from my hon. Friend the Member for Chichester (Mr. Tyrie), the argument about transparency also applies to currencies.

When a currency is under pressure it is difficult for a central bank to start to sell it. It is regarded as near-treachery. When the British and French currencies came under serious pressure in 1992, the US Fed and the Bundesbank were expected to support them, not to sell them. There has been some controversy over whether the Germans supported our currency as vigorously in 1992 as we think they should have done. I think that my noble Friend Lord Lamont has views on that subject, which may come out in his book to be published shortly.

In theory, central banks are supposed to co-operate with each other so that when a particular currency comes under pressure, they rally round to support it. The idea that by diversifying into foreign currencies the British Government will suddenly have much more flexibility is an illusion. I very much doubt whether the Government would like the market to see them selling their newly bought euros because they thought that the euro was about to collapse even further. That would not help the Prime Minister's position in the centre of Europe.

Mr. Nick St. Aubyn (Guildford): Does my hon. Friend agree that, in selling our precious gold reserves and putting the money into the collapsing euro,

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the Government will be showing much more support for the euro than those who belong to it showed support for us in 1992?

Sir Peter Tapsell: Yes, but one should not conduct economic policy on a tit-for-tat basis. Incidentally, we would all be wise not to assume that the euro will continue to weaken for ever. I can speak with a free conscience on this matter, as I voted against every clause of the Maastricht treaty. Indeed, there would never have been a European central bank if three more of my colleagues had joined me and others in voting against the paving motion.

The fact is that the euro now exists and it is just another currency, as I always predicted it would be. Currencies go up as well as down. In my view, the dollar is today over-valued and the euro is under-valued. The fact that in a few weeks or months the euro will probably go up against the dollar and the pound does not strengthen the argument for joining it. Euro-sceptic that I am, I do not believe that it would be in the British national interest for the euro to collapse because that would lead to chaos in Europe and would be damaging for our export markets.

The second reason why one should hold gold reserves is because they build public confidence. Market research carried out last year by one of the world's leading research companies in several European countries showed overwhelming support for countries maintaining gold reserves: 76 per cent. of respondents in France, 72 per cent. in Germany and 75 per cent. in Italy said that gold reserves are important in supporting a strong economy; 84 per cent. in France, 83 per cent. in Italy and 65 per cent. in Germany agreed that having a strong gold reserve helps to bolster public confidence on which economies depend. Similar results--70 per cent. opposing the sale--were received when the British public were questioned on the subject in a recent opinion poll.

Another reason why central banks should hold gold is that, over the very long term, gold maintains its value. In 1900, the value of gold was almost identical to its value in 1717. Although its soaring up to $850 in 1980 artificially over-priced the market--it has been coming down ever since--gold holds its long-term value, as we have seen throughout history. On 27 May, the Financial Times pointed out that $35 an ounce, which was what gold was in 1971 before President Nixon and Treasury Secretary Connally broke the link between the dollar and gold, would be equivalent to $281 today. Thus, despite the fact that gold is at the bottom of a long bear market, it was still worth more than $35, in today's terms, when the Government made their announcement. It has now dropped below that figure.

Mr. Sheldon: It all depends where one takes one's basis. However, $35 an ounce was the price before the war, so the hon. Gentleman must take that as his basis as well.

Sir Peter Tapsell: The right hon. Gentleman is a distinguished former Treasury Minister, but I must point out that that was not the price before the war. The price of $35 an ounce was fixed at Bretton Woods in 1944. In 1932, President Roosevelt devalued the dollar against gold and we devalued, under a Labour Chancellor, in 1931. However, the $35 that was officially linked to gold--which put the whole world not on a gold standard

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but on a dollar standard between 1945-71--dates from Bretton Woods. I have not argued that gold has been a particularly good market investment in recent years, but it has not been as bad as many people would suppose. Even since 1971, it has roughly held its value in line with inflation.

My next argument for central banks holding gold is that a country's reserves should be diversified to minimise risk. Research shows that gold is an ideal portfolio diversifier. When I was given the Brunei fund to manage, I had to go on a crash course because I knew nothing about gold management. I took much expert advice and even commissioned, at great expense, advisers to give me an idea of how much gold should be in a portfolio. The boffins who deal with those matters believe that, over a long term, the ideal gold holding in a major portfolio is about 20 per cent. That is because gold is an ideal diversifier as its returns are what is technically known as "negatively correlated", which means that they operate in a counter-cyclical manner. When bonds and equities fall in price, gold tends to go up.

Gold prices are much more volatile than other market prices. It is not unusual for gold to go up 2 or 3 per cent., or down 2 or 3 per cent. in a single day. If Wall street falls by 2 or 3 per cent. in a single day, it is headline news throughout the world. Thus gold has a stabilising effect in a long-term portfolio.

Gold is also the asset of last resort. Although it is needed in good times, it can be vital when times are difficult. The last sale of gold in France was in 1969 to deal with the financial consequences of the May 1968 uprising. In Portugal gold was last sold following the 1975 revolution. More recently, in 1991 India used its gold reserves to borrow $1 billion to avoid default.

I have already quoted Mr. Greenspan, who said that in 1944 Germany could not buy anything except with gold. In a real crisis, there is no doubt that gold is important. It is not just my taxi driver who takes that view. When I was in Vietnam last year, everybody told me that every Vietnamese peasant has gold underneath his floorboards or his straw because the Vietnamese have no confidence in their currency. We tend to talk about gold in terms of official reserves, but a lot of unofficial gold is hidden in China and Vietnam and, one is always told, in France--although I have a French wife and I have not yet managed to discover her gold hoard. It is widely believed that people hold gold all over the world secretly, against the possibility of disaster, which is a tremendously important market consideration. That is what is meant by the psychology of gold and it is extraordinary that the Bank of England should have taken this decision, and the way that they have done so.

I do not wish to go into the question of International Monetary Fund gold sales in any detail, because that is a separate, although obviously related, subject. The IMF is not a central bank. It is ironic that the Chancellor, who is understandably keen to help the poorer nations of the world, seems also to be keen to persuade the IMF to sell gold. He hopes that it will do so, but many poorer countries would be extremely hard hit by that.

Hon. Members who are interested might care to read the recently published pamphlet entitled "Gold mining's importance to sub-Saharan Africa and heavily indebted poor countries", because 41 HIPCs mine gold, and it is an extremely important part of the exports of nine of those

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countries. Curiously enough, the sale of IMF gold, if it depressed the price of gold still further, would seriously and adversely affect many of the poorest countries.

The sale of our gold will not increase the size of our reserves; they will remain the same, so that argument cannot be used. Many countries feel that they ought to be building up their reserves, and they are all trying to do so. An extraordinary aspect of the situation is how dangerously low Britain's net reserves are. Their net value on 7 May was only $15 billion. A more sensible policy than selling gold would be to build up our reserves by buying dollars and other currencies with our sterling. That would help to lower the exchange rate of sterling, which is a desirable objective at present, and increase our reserves of foreign currencies, which the sale of gold will not achieve.


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