CHANGE IS CAUSED BY ELECTIONS IN FRANCE

Press, Volume XCIII, Issue 27875, 25 January 1956, Page 12

CHANGE IS CAUSED BY ELECTIONS IN FRANCE

LYNCEUS

[By

MARKET IN GOLD

of the "Economist”}

[From the Economist Intelligence Unit}

The international market in gold has recently been stirred into unwonted activity. The main reason for this has been the result of the French election and the prospect of political instability which this opens up. This has led to a sudden revival of the hoarding demand for gold in France, thus reversing a trend which had prevailed for the last two years. Private hoarders of gold in France were once upon a time estimated to hold more than 3,000.000.000 dollars of the metal, a figure appreciably higher than the official reserve of Great Britain and about equal to the reserves held by the Bank of France and the French Government. . But these private investments in the precious metal began in 1953-54 to wear an unpromising look. It costs money to hoard gold. Gold is not a productive investment; it has to be safeguarded and insured. It may repay an investor who is fleeing from a rapidily depreciating currency and who finds in gold a hedge against the risk of inflation; but much of the gold acquired by French hoarders was bought at times when the free market price for metal commanded a substantial premium over the official price. In the early post-war years the free market price for gold rose to over 50 dollars an ounce. That premium disappeared as more and more goldproducing countries found themselves attracted by the prospect of selling their gold not in the official but in the free market. Though the International Monetary Fund fought a long rearguard action against such sales, it was doomed to defeat. As soon as it became possible, without countering the right of the fund to sell gold in the free markets the premium was bound to disappear. French hoarders then saw the currency value of their gold falling. At the same time they realised that French investors who has chosen other inflation hedges, namely, the shares of good industrial enterprises, were coining the tax-free gains of a booming Bourse. During 1954 they began to get rid of gold, and last year the movement gathered considerable momentum. The reinforcement of the Bank of France’s gold reserve during 1955 was, in large measure due to its purchases of released gold. A Change

All this changed, however, when the result of the General Election opened a renewed vista of political uncertainties, while the strengthening of the Communist representation led to a headlong . fall in French security prices. The former trend was reversed, and for the time being at least, the French investor is again pinning his faith to the familiar one kilo bar or the Napoleons, Eagles and Sovereigns, for which coins he is now prepared to pay an 18 per cent, premium over and above the values of the metal they contain. So far, however, there has been little echo of the movement in the market for gold shares. It has recently been reported from South Africa that the net movement of capital into that country during the first three quarters of 1955 was a mere £2.000.000 compared with a figure of about £50,000,000 for the corresponding period of 1954. There have been substantial investments in South Africa. The World Bank, notably, has made loans to the Union of South Africa for public utilities and railway development. But this flow of capital has been largely neutralised by massive sales of gold shares from Great Britain and the Continent of Europe. In the prevailing circumstances these sales have in large measures had to be absorbed by South African investors and finance houses.

These sales of gold shares can be explained on two counts. The first is the dismal prospect of the gold industry as a vehicle for profitable investment. Goldmines are being crushed between rising costs and the fixed price for their metal. There is little hope of an early reduction in costs. On the contrary, the prospect, with inflation still gathering momentum throughout the world and both native and European workers mobilising for more pay. is that costs will rise further. Nor is there much hope that in the forseeable future the monetary price of gold will rise.

Determinant Voice of United States The determinant voice in any such decision must be that of the United States; and there seems to be no body of opinion in the country to support a move which, however explained, would be regarded as a devaluation of the dollar. The time for such a monetary “trick” may come; but only if and when the United States is plunged into such economic depression that it will try to raise itself by its own bootstraps in this fashion. It is doubtful if such a depression will ever again occur in the United States; and

if it did, it is doubtful whether the advanced techniques of monetary management would make it to resort again to such crude, mv«J devices as a change in the monetary price of a metal in the production of which the United States has so very small an interest Other methods <jf “pump priming” would themselves far more than one which would directly help such countries m South Africa and Soviet Russia neither of them particularly popin',, in the United States.

The other reason why South African gold shares have been sold n the world markets is that the prospect in the Union of South Atria is not viewed with much confidence. There is. however, a possibility <g rescue from this' dismal gold sham prospect. The premium on the price for free market gold may re-establiM itself. Recent events in France bavy pointed, as yet modestly, in that direction. There is also a substantial potential demand for gold from the Middle East where a decidedly ex. plosive situation is developing. It is in the Middle East that gold is still most widely used as the normal medium of exchange and store of value. The fret markets in Beirut and Kuwait handle a substantial proportion of the world'i dealings in free gold. If political tension increases further in the countries surrounding Israel, the additional demand for gold may be sufficient to recreate a premium over the official price of 35 dollars aa ounce.

It would, however, be courtinr disillusion to expect this premium to attain substantial proportions. A big premium would immediately be swamped by offerings of newly-mined gold from the biggest of all the free markets, namely, the reopened London bullion market. During the last year that market has revealed its powers to dominate the gold situation throughout the world. It has handled the bulk of the South African production and has been largely instrumental in keeping the free market price of gold between the narrow margin? of 34.96 dollars and 35.06 dollars—a difference of about one-quarter per cent. In fact, it is now the official price which determines the true price of gold; and the possibility that seemed to exist not many years ago of the free price dragging the official price upward has disappeared. Barring another cataclysm, it is unlikely to return.