PRICE RISE SEEMS TO BE INEVITABLE

Press, Volume LXXXIX, Issue 27009, 8 April 1953, Page 8

PRICE RISE SEEMS TO BE INEVITABLE

FUTURE OF GOLD

[From the ’’Economist" InteUigence Unit)

It has been officially confirmed by the South African Finance Minister, Mr Havenga, that when the Chancellor of the Exchequer, Mr Butler, was recently in Washington expounding his Commonwealth Plan, he made specific suggestions to the United States Administration that the dollar price of gold should be raised. The answer which Mr Butler received has not been published. It may well be that no precise official position was taken on this issue, since none was taken on any other aspects of the plan put before the United States. This, and many other facets of American foreign economic policy, will come under review in the months to come by the special committee set up by President Eisenhower under the chairmanship of Mr Lewis Douglas, former United States Ambassador in London. Until that committee has reported, it would be useless to look Xor any bold or imaginative initiative in the field of foreign economic policy on the part of the United .States. In any case, the Administration of President Eisenhower will want several months to take its bearings and to clear up the purely administrative chaos that has attended the shift from 20 years of Democratic rule to Republican occupation of the White House. It will also need the whole of this period for the Administration to .test the views of Congress on these issues and, above all, te gauge the measure of its ascendancy over or subjugation to Capitol Hill. Meanwhile, all hopes that the price of gold may be raised must be held in abeyance. Nonetheless, it remains part of the Commonwealth plan. In so far as that plan was divulged to members of the Organisation for European Economic Co-operation, when Mr Eden and Mr Butler attended the council meeting in Paris, it included this increase in the price of gold under the heading of “Measures to remedy the inadequacy of the world’s gold and dollar reServes.” Admittedly, it is only one of many alternative proposals to this end. The inadequacy of those reserves could be eased by direct credits from the United States or by the provision of standby assistance on the part of a revivified International Monetary Fund. But it cannot be doubted that the increase in the price of gold holds a high place in the Commonwealth plan. It does so not only because it would immediately increase the dollar value of existing gold reserves in the world, but also because it would increase the flow of dollar earnings of the sterling area, which provides today more than 72 per cent, of the gold produced in the world.

Free Market for Gold While hopes of an increase in the official price of gold wjll remain dormant for some time to come, the free market for the metal will be determined by the twin factors of economic and political stability or instability in the world at large. That free market price has in recent months fallen to within a mere two dollars premium over the official price of 35 dollars an ounce. In the most important of the so-called premium markets gold has recently been quoted at around 37 dollars a fine ounce. The margin is surprisingly small. The position is very well put by the London bankers and bullion merchants, Messrs Samuel Montagu and Company, in their “Annual Bullion Review for 1952. These authorities point out that the demand for gold in the free market remains strong and that there is no reason to suppose that it will not easily absorb all the newly-mined gold that is likely to be offered in the coming year. And, as a reason for this view, they write: “So long as the world political situation remains as it is and so long as the present economic situation maintains a system of currencies that are in part blocked, frozen, bilateral and inconvertible, the twin spectres of war and devaluation will remain. The only hedge known to most Europeans and all Asians against this dual calamity is the holding of gold; and at the present price it is reckoned a small insurance premium to pay.” A good deal may have to happen be-

fore this demand for gold in the free market is ultimately translated into a higher official price for the metal. So far there is no hint that the case for an increase in the official price is evoking any sympathetic echo in the United States administration. Before it does so, it may well be that the United States will have to find itself in the grip of an economic recession, in which the reflationary effects of a rise in the dollar.price of gold would be positively welcomed. On the other hand, there are forces other than those of pure logic which will, with the passage of time, bring increasing influence to bear on the United States to view an increase in the world prices of gold more sympathetically. One of these is the fact that the free market is now absorbing so large a proportion of the world’s supplies of newly-mined gold that the urgent needs of monetary reserves are being starved. It is estimated that- last year over 12,000.000 fine ounces of gold were absorbed by the free gold market, os compared with about 9,500.000 ounces in 1951. The figure for 1952 repre--1 sents very nearly one-half of the total production of gold in that year. It is estimated that about 40 per cent of the newly-mined gold went directly to the premium market. That would account for about 10,000,000 ounces. The other 2,000,000 came from various institutional sources which hold gold. These include central banks, which, during the past year, have been prepared to sell gold on the open market and particularly in the form of coins on which a substantial premium persists, thus securing for 1 themselves a considerable profit. Reserves Need Protection As the free gold market gains la ■ importance and maintains an apprecl* , able premium over and above the present official price of 35 dollars an I ounce, it can be assumed that the drain which the free market represents not only on the flow of newlymined gold but on existing metallic stocks will tend to increase. If this be so, then the inexorable logic of facts will demand that the monetary . authorities of the world, including the ’ United States, raise their official price ’ for gold as a protection of their existing reserves. The main reservation which must ‘ be made to these suggestions of an in- : evitable expansion in the market for ’ free gold concerns the spread of communism in the Far East At first ; sight this might appear to be but another argument in favour of expecting a larger hoarding demand and ! therefore a higher price for free gold. As against this, however, it must be ! admitted that in the mainland of China, which used to be one of the principal markets for hoarded metaL . the spread of communism has in fact ; killed what used to be a thriving . trade in bullion.

It is authoritatively reported that the most active of these markets, that of Canton, has now come to an end. No transactions are reported. The communist authorities have succeeded . in stamping out all business in bullion. So ruthless and efficient is the control and so terrifying the sanctions applied by the authorities that it appears impossible to operate illegal bullion and exchange business. As Messrs Samuel Montagu point out in their review. "In suppressing free market gold dealings, it would seem that the knife and the noose of totalitarian methods are more effective than the gentler democratic approach.” In China, however, communist rule is now no more than five years old, whereas the trafficking instincts, the traditions of holding gold and silver have many centuries behind them. It would be a strange reversal of all historical logic if these instincts were to remain permanently suppressed. It seems more probable that, over the course of years, as financial and commercial intercourse with the mainland of China recovers, and as Chinese communism gradually acquires local colouring, the precious metals will again begin to flow to the mainland. If and when they do, another pohmt argument will be added to those that already suggest that an ultimate rise in the official price of gold is inevitable.