Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 80-99)



  80. Did you do any analysis of whether you thought those buyers were likely to increase or decrease in number or in the amount they bought?
  (Mr Plenderleith) Perhaps I could pick that up. We did quite a big review and do do quite a careful forward look as to what we think the long term prospects for the gold market are, recognising that we have no special clairvoyance, but we try to read the surveys of experts and form a judgment.

  81. Did you gain the impression at the time you decided to sell the gold that there was an increasing number of potential buyers so the price was not going to drop too much?
  (Mr Plenderleith) No we had the impression there was an increasing number of potential sellers. The gold market is in a very unusual situation in that underlying demand essentially for jewellery, but also some industrial uses, and some private hoarding is larger than the annual rate of production from the mines, but the difference is made up by unloading of excess holdings by central banks. As Mr O'Donnell has indicated, there have been increasing indications of other central banks doing our kind of calculations and wanting to sell and of course their sales would be likely to hold down any rise in price, indeed depress it over years ahead.

  82. Presumably a short number of years ahead and after they had sold all they had wanted to then the price might rise again?
  (Mr Plenderleith) For as many as years ahead as we could see reasonably, five or ten years, so there was no reason in our view to believe that the gold price was likely to rise in the foreseeable future and that you could get a better price by waiting.

  83. Did you believe that you were likely to need that currency for intervention purposes or whatever during the next five to ten years?
  (Mr O'Donnell) That is a very difficult question.

  84. If not, it seems clear that we might have been better to hold on until the other countries had finished their sales.
  (Mr Plenderleith) The risk exposure would have remained and the Government wished to reduce the risk characteristics. That was something it wished to do sooner rather than later.

  85. Indeed, but you were indicating that you thought that the chances were over the longer term that some of these sales might give up, some of the buyers might increase in number or the amount they bought, and it looked as if in the longer term there might be therefore some advantage—
  (Mr Plenderleith) Not in any reasonable prospect we could see. It seemed to us likely that sellers from existing holdings were likely to predominate for some number of years ahead. That is true of most of the forecasts.

  86. Five to ten years?
  (Dr Mills) Within that time you could have industrial discoveries that increased the demand for gold dramatically, or you could have more discoveries of gold in the ground that could dramatically reduce the price. Longer term than that I do not think we are prepared to go.

  87. Can I ask a technical question. There are five players in the Fix. Can they bid either to sell or to buy on behalf of anybody else or do they have a small number of clients?
  (Mr Plenderleith) They are major traders in the gold market with a wide range of clients and customers so that they will be trading out of the Fix not only their own positions but predominantly in fact to order for customers.

  88. So could anybody get past the Fix in the sense that they could go to one of those five and say, "I want to buy some gold today"?
  (Mr Plenderleith) Indirectly, yes, by going to one of those five.

  89. One of the arguments against the Fix seems to be that it is less open because there are less players in the market. It seems to me that is only partially true in the sense that if anybody can get into that Fix indirectly at least—
  (Mr Plenderleith) It is only partially true but it is materially so. Those who are not members of the Fix would need to go to a Fix member. Some of those would be competing banks who would not necessarily wish to show their orders to competitors who are Fix members and of course, typically, Fix members charge a commission for outsiders whose orders they execute.

  90. In terms of the Fix being less transparent, you say that is because you do not get the total amount of the sales as you would do in an auction?
  (Mr Plenderleith) Yes.

  91. Are you talking there just about our sales or is it less transparent because you do not get the total amount of sales? In other words, if we said what our sales were in the Fix would that mean in your view that it was just as fair and transparent?
  (Mr Plenderleith) We can be transparent in our operations in the Fix by indicating what we have done today. We do not have that information about the total turnover of the Fix which is not published.

  92. In terms of making it transparent, is us not saying what we were buying or selling in the Fix just as transparent as doing it through an auction?
  (Mr Plenderleith) It is transparent as to what the Government would be doing, but it does not give the market an indication of what that is in proportion to the turnover of the Fix.

  93. We cannot force other people to say what they are doing. I would have thought, if we say how much we are going to buy or sell in an auction, that is very similar to saying how much we are going to buy or sell in the Fix.
  (Mr Plenderleith) It would make it a more open process, yes, we could deliver that degree of transparency.
  (Mr O'Donnell) But we still would not get all the transparency we get from an auction.

  94. Why not?
  (Mr O'Donnell) Because it is open, it is open to anybody, they do not have to go through members of the Fix, they do not pay commission—

  95. But they know what is happening. You are saying how much you are selling and, what is more, it is known at what price you sold.
  (Mr O'Donnell) You would know things like the cover and the rest of it from an auction.
  (Dr Mills) Also the market knows well in advance when our supply is coming, they would not know in advance when we were selling through the Fix necessarily, unless we pre-committed absolutely to say months or weeks in advance, "We are going to sell X amount in the Fix."

  96. Can I turn now to the question of whether an announcement should have been made or not? When the announcement was made of the UK's decision, there was about a 10 per cent drop in price, is that what you expected?
  (Mr O'Donnell) It is very difficult to work out what the price elasticity is to announcements of that kind. We were not at all clear precisely how much it would fall but we would certainly expect it to fall somewhat.

  97. If the announcement which the European central banks made and the agreement which led to about a 25 per cent increase in the price—almost overnight I gather—had happened before you had made your announcement about your wish to sell, that would perhaps have given you some indication, would it, of the sort of price jump you could expect as a result of an announcement of this sort? Would that have led you to consider again whether you should make announcements about quite such big sales?
  (Mr O'Donnell) It is difficult to know. What you would have to know is what the news in any announcement is, ie what the markets previously expected versus what they then expected after an announcement had been made. So to work out the news element of the European central banks' announcement, you would have to have a view about what they thought those individual central banks would have been selling versus what they actually said they would sell over that period. Quite often, it is difficult to come up with what the markets thought about these issues, so it is not at all a clear view. Again, the European central banks' announcement did create a spike in the price but it went off again quite quickly thereafter.

  98. If you look at Diagram 15 on page 20, it looks as if the second, fourth and sixth auctions all took place shortly before a price hike—we know why the price hike took place before the first one—do you have any explanation as to why that is? It looks slightly suspicious that every time we sell, that goes into the market, the market if you like absorbs the fact we have sold a bit more, and there is an immediate price hike because, one would guess perhaps, people suddenly realise, "Help, we have not bought any of that UK stuff, we had better put the price up and buy somewhere else quickly."
  (Mr Plenderleith) I do not think, Mr Chairman, those spikes are related to our auctions. If you look at the other side of the coin, the third, the fifth and seventh auctions come quite a way up from the lower levels before the spike. The big spike after the second auction was indeed the Central Banks' agreement which you have referred to. The spike after the fourth and the sixth auctions represents news into the market, in the first case a reduction in hedging by producers and, in the second case, a fall in the dollar. In each case we got some of the benefit of that spike in the following auctions after that. That is the purpose of staging the thing out, so that hopefully we gain on the swings even if we lose on the roundabouts occasionally.

  99. Mr O'Donnell, I think it was in answer to something the Chairman asked, said—and I did not write it down quickly enough to get the exact words—something to the effect of, if we had put in doubt our agreement on selling the gold, that would have been dangerous. This was in relation to whether or not we could have said just before the European central bank announcement that we were going to put off that particular auction. It sounded odd to me. I would have thought if you had said at that moment that you were going to put it off, that would have said to the market not "Help, help, the price must now go down", but, "Hey these people know the price is about to go up", and therefore if anything we ought to be offering more for gold in the short term because there is some reason to think it is going to go up shortly.
  (Mr O'Donnell) No. My worry was, if we had tried to play those games and cancelled an auction then, before the agreement—and we would have had to do this before the agreement was made with the European central banks—there would have been an issue about going—

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