GOLD ONE COMMODITY PRICE THAT DOES NOT VARY

Press, Volume XCV, Issue 28231, 20 March 1957, Page 12

GOLD ONE COMMODITY PRICE THAT DOES NOT VARY

IBy

"LYNCEUS"

of the "Economist”)

[From the "Economist" Intelligence Unit}

London, March 12.—A strange metamorphosis has come over the world gold market in recent months. Political crises may come and go, war scares may blow up and die down, confidence in paper currencies may wax and wane, but the 35-dollar price of gold goes on for ever. It has, of course, gone on, if not for ever, at least for 24 years, as far as the official price for gold is concerned. In that fact lies the main complaint of all who have a vested or investment interest in gold and find it difficult to understand why their metal should be the only commodity that has been untouched by the fall in the value of paper currencies over this period. That, however, is another problem.

The stability of this official price for gold could, until comparatively recently, be said to stand in contrast to what happened on the free market. In that market, the price tended to respond sharply to sudden increases in the hoarding demand for the metal, to war scares, or to increases in the supply due to sales from Soviet Russia or “dishoarding” by speculators. In the free market the price of gold has risen as high as 52 dollars an ounce since the war, though it has never fallen appreciably below 35 dollars—this being an effective floor as this is the figure at which the United States Treasury is prepared to buy in unlimited quantities. The Test of 1956

This sensitiveness and response have now departed. There can have been few years that have offered more encouragement to speculation and hoarding than 1956, with its crises in the Middle East and the Communist satellites, its run on sterling, and the deepening difficulties of the franc. Yet, during that year the freemarket price of gold fluctuated between the extremely narrow limits of 34.89 dollars and 35.09 dollars—less than one-third of 1 per cent, on either side of parity. There were considerable fluctuations in hoarding demand for gold last year. It has been authoritatively estimated that altogether some i 0.000.000 ounces of gold, or more than one-third of the world production, was diverted from production of new gold to satisfy hoarding demand. Of this total, some 4,000,000 ounces disappeared undergrounck in Europe, mainly France, a further 3,000.000 was distributed through the Middle East, mostly through Beirut, and about 2,250"(K)0 were canalised to the Far East through Macao, the “Clapham Junction” of the gold traffic in, that part of the world.” In addition to these figures of hoarding, it is estimated that about 3,000,000 ounces of gold were bought in the free market for genuine industrial purposes. All these are estimates of the net offtake of gold from the free market. The turnover of gold in the free market must have been many times this figure. Why, in the light of this activity and keen demand, did the price of gold remain sb stable? The only possible answer is that the market’, as at present constituted, must have the capacity to match, through the elasticity of its supplies almost any conceivable variation in demand. The elasticity of its supplies is, in fact, almost infinite.

Sales Uncontrolled The first reason for this is the complete disappearance of the International Monetary Fund s attempted control over sales of gold by the gold-producing countries. For mans’ years after the war the I.M.F. in Washington attempted to compel its members to deal in gold only at the official prices, on the ground that any other course would be tantamount to an official admission by the country concerned that its currency had been devalued or upvalued. It was because the main gold producers were not allowed to sell their gold in the open market that the prices in these open or free markets climbed at times to inordinate premia over the parity of 35 dollars an ounce. The I.M.F. control was never perfect and gradually metaphorical coaches and horses were driven through it. It was finally abandoned, and now there is complete freedom for all gold producers, whether their countries are bers of the I.M.F. or not, to sell their gold in the dearest market. That, in itself, should sufficient to provide an «®® ct *’ e response to any conceivab e increase in the hoarding or industrial demand for gold, other than a rush to hoard such as that which developed when President Nasser nationalised the last vear. It was then that tree gold touched its highest price for 1956, namely 35.09 dollars. This potential supply has, however, been supplemented by an oven more generous source of gold, namely the central banks of Europe. These have become the biggest single factor m the gold market, where they arbitrate to such good purpose as to keep the price of gold fairly stable around the official price of 35 dollars. The explanation of their gold operations is to be found in the mechanics of the European Payments Union settlement At the monthly settlement of E.P.U. the debtors settle their deficits as to 75 per cent, gold and 25 per cent, credit, while the creditors, conversely, receive 75 per cent, gold for their surpluses. For the purposes of this settlement, gold is calculated at the fixed price of 35 dollars an ounce. It ‘follows, therefore, that any country which knows it will be called upon to pay gold at the ensuing settlement will buy gold with some of its dollars if the free market price happens to be appreciably below 35 dollars an ounce. Similarly, a creditor country, knowing it will be receiving gold at the ensuing settlement, will sell that gold in advance in the free market if the free market price is appreciably above 35 dollars an ounce. Caught between these powerful forces the free market price for gold cannot vary far from the 35-dollar parity. Since the gold in question need undergo no physical transportation—being earmarked for the central bank concerned either at the Bank of England (since London is now the principal free market) or at the Bank for International Settlements at Basle —the margins between which this arbitrage operates are narrower than those of the orthodox gold standard "gold points,’’ which had to take into account the cost of packing, shipping, and insuring

of the gold. Gold is, in fact, entering into foreign exchange operations with even greater delicacy and smaller tolerances of fluctuations than obtained in the classical days of the international gold standard. Russian Operations

The intrusion of Soviet Russia into this delicate mechanism in no way affects its delicacy. Last .year Russia sold nearly 4.500.000 ounces of gold to the free market. This represented the largest amount sold in any year since the war and is estimated to represent about one-third of the Russian annual production (which would put Russia very close to South Africa in the claim to be the largest producer of gold in the world).

The Russian sales are made for the most part on the continent of Europe and payment is taken in transferable sterling, the Russians in this way maximising the sterling proceeds of the gold they sell. The gold is sold in order to feed the sterling balances with which Russia finances the greater part of its foreign trade. Last year the biggest Russian sales were made towards the end of the year, when Russia was helping to meet the payment difficulties of Poland, Hungary’, and other satellites. The Russians are extremely “pfice-conscious” in their gold operations. Their attitude gives the lie to the occasionally expressed fear that the Soviet authorities, in order to disrupt the economies of the free world, might one day swamp and smash the market for gold. The reverse is true. The Russians are aware of gold in the world and their own economy. They are out to extract the maximum advantage from their possession of a large gold reserve and production. That nose is too big to cut off to spite the free world’s face.