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European Central Banks Blew It With Gold

Switzerland, the U.K., the Netherlands and Spain all were on the wrong side of the gold trade.

Wow. What a gold boom!

The yellow metal has turned out to be one of the best investments of the 21st century, rising from around $260 an ounce barely half a dozen years ago to $831.50 around midday Friday. Most of those gains have come in just the last two years.

Gold has taken a tumble this morning, falling nearly 3% from Friday's Comex close of $834.70. But it's still been quite a ride.

If you're kicking yourself for missing out, here's a crumb of comfort: Some really smart people fared even worse.

After all, you probably weren't actually dumping gold bullion by the truckload right at the bottom of the market.

For that bone-headed move, you have to look to the brightest, best-connected and most financially savvy minds over in Europe --namely, their central bankers and finance ministers.

Oddly enough, it's the central banks with the best reputations that made the worst moves.

Like the Swiss.

They've got into trouble before over gold -- like the bullion that made its way into their safety deposit boxes back in the early 1940s.

But like them or not, the Swiss have a hard-earned reputation for financial prudence and an ability to take the long view. So their central bank looked smart coming into the new millennium with one of the world's biggest holdings of gold bullion in its reserves. Switzerland had nearly 2,600 tonnes of bullion. Only France, Germany and the U.S. had more.

If only they'd kept it that way. Instead, as part of a program to diversify their portfolio, the Swiss dumped half of their bullion.

The timing could hardly have been worse. The Swiss sold 1,300 tonnes of gold between 2000 and 2005. In other words, just before the current boom really took off.

According to data compiled by the World Gold Council, the Swiss sales peaked in 2002, 2003 and 2004, when they sold around 280 tonnes each year.

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Based on the average market prices in those years, the Swiss probably raised about $14 billion from the sales.

The value of that bullion, as of Friday? Try $34 billion -- or $20 billion more.

Those missed profits work out at about $2,700 for every man, woman and child in Switzerland.

The Swiss weren't alone. The Bank of England chose 1999-2001 to halve its total gold holdings. It sold 395 tonnes at an average price of around $275.

Oops. Two hundred years ago, the British might have hanged the man responsible for a blunder of this scale. At the very least they would have shipped him off to Australia in leg irons. He ended up costing Her Majesty's Treasury $6.9 billion in lost profits (based on Friday's price).

Today? They make him prime minister. Most Americans know little about Gordon Brown, the dour Scot who recently took over as PM from Tony Blair. But for 10 years, until this spring, he served as Blair's Chancellor of the Exchequer, Britain's chief finance minister. And among his landmark moves was this decision to auction off the nation's gold.

The matter has recently turned into a minor scandal in Britain, following revelations that Brown overruled professional advice at the Bank of England to carry out the sales.

The other central banks on the wrong side of the gold trade include the Dutch and the Spaniards, who who brought it all to Europe in the first place.

Based on the average prices in the years they sold and the price today, the Dutch missed out on an estimated $4.8 billion in profits and the Spanish central bank $1.1 billion, based on Friday's prices.

The U.S., by contrast, kept hold of its 8,137 tonnes, which has seen its value rise over the last seven years by $144 billion , as of Friday.

The numbers are estimates. And central banks may have clawed back a small percentage of their losses by diversifying into other currencies (just so long as they weren't U.S. dollars).

And the Swiss, the Brits and others are of course showing profits on the gold they kept.

Still, markets tend to assume that finance ministers, central bankers and their staffs are wiser and better-informed than everybody else. It doesn't always seem to work out that way.

In keeping with TSC's editorial policy, Brett Arends doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Arends takes a critical look inside mutual funds and the personal finance industry in a twice-weekly column that ranges from investment advice for the general reader to the industry's latest scoop. Prior to joining in 2006, he worked for more than two years at the Boston Herald, where he revived the paper's well-known 'On State Street' finance column and was part of a team that won two SABEW awards in 2005. He had previously written for the Daily Telegraph and Daily Mail newspapers in London, the magazine Private Eye, and for Global Agenda, the official magazine of the World Economic Summit in Davos, Switzerland. Arends has also written a book on sports 'futures' betting.