ForexSpace - Buried in yesterday's ‘Granny Bashing’ UK Budget, the Chancellor of the Exchequer imparted an interesting snippet of forex news, commenting that his Government was "taking the opportunity to rebuild Britain’s reserves." In particular, he highlighted the country's gold holdings, the value of which has risen on the Coalition’s watch.

“I can confirm our gold holdings have risen in value to £11 billion,” trumpeted Osborne. (It would have been £24bn if Gordon Brown hadn't sold 400 tonnes of it between 1999 and 2002). Which is why Osborne openly attacks Brown's decision to sell the gold when he was Chancellor as one of the Treasury's most heinous financial mistakes, costing taxpayers some £7 billion. As Osborne points out: “This does not include the 400 or so tonnes of gold sold a decade ago for £2 billion, and which would now be worth six times that at over £13 billion pounds.”

A gold reserve, as we know, is the amount of so - called ‘yellow brick’ held by a central bank or nation state as a store of value, and a guarantee to redeem promises to pay depositors, paper money holders or trading peers. It can also secure a currency, and as such, therefore, is an overriding factor in valuing how a nation’s foreign exchange reserves are an offset to gross public sector debt in calculating the ratios of net public debt to GDP on which rating agencies and financial markets lay great store in judging the quality of a sovereign credit.

Whilst Osborne’s motive in pointing out Gordon Brown’s folly was of course highly political (by association identifying his Labour shadow, Ed Balls – a man widely believed to have been the architect of Brown’s economic policy, and therefore the gold sales plan) Osborne was certainly also anxious to demonstrate his awareness of the low level of UK foreign exchange reserves and how this weighs negatively on the UK’s coveted triple-A credit status. The Chancellor’s predecessor’s decision to sell half of Britain's reserves when the price of gold was at a twenty-year low caused stinging criticism of the man who succeeded Tony Blair as prime minister.

All That Glisters…

Gordon Brown and the Treasury have stoically resisted to shed any light about the sale, which also helped to scupper Labour's general election campaign and bolstered claims that they had mismanaged the economy. “The British public have a right to know what happened,” says Osborne, “and why so much of their money was lost. The documents should be published immediately.'

Suggestions abound in forex news circles as in any other that Brown forced through the sale of the reserves in spite of significant misgivings on the part of the Bank of England. Indeed, according to the rumors, senior BoE officials were not even consulted about the decision, driven through as it was by a select cabal of senior Treasury aides close to Mr Brown, including Ed Balls and Ed Miliband.

Osborne can be justifiably robust in his crowing how - as a consequence of his policies - the UK’s net foreign exchange reserves current rest at $46.8bn. Whilst this is an undeniable increase from the $34.4bn at which they stood in May 2010 when the Coalition entered office, the reserves are still minuscule in comparison, say, to China’s, at $3.18trn. Even Singapore at $245bn far accedes the UK. Yet most surveys of global financial business accord a larger proportion of that business to London than to Singapore, which could leave the UK much more vulnerable than Singapore in a future financial crisis. No wonder, with credit ratings in the spotlight so much these troubled days, the UK Government should want a larger reserves cushion and why the rating agencies might regard a rise in the UK’s reserves as lessening the risks surrounding the sovereign credit.

Drew Hillier. Editor