Boom In Sovereigns SIGNIFICANCE OF GOLD IN WORLD FINANCE

Press, Volume XCVII, Issue 28480, 9 January 1958, Page 8

Boom In Sovereigns SIGNIFICANCE OF GOLD IN WORLD FINANCE

(By

“LYNCEUS”

of the “Economist”)

IDU UJ J I From th« "Economist’* Intelligence Unit)

An interesting announcement from the British Treasury appeared towards the end of December; it was to the effect that the Royal Mint would shortly undertake a further minting of gold sovereigns. The coins will not be issued for circulation in the United Kingdom but will increase the stocks of sovereigns in the nation's gold reserve. This, it is said, will enable sovereigns from these stocks to be released for circulation abroad, and to meet a demand which has given rise to a great deal of counterfeiting.

There is no likelihood of a return to gold coinage and circulation in Britain; but the Treasury

announcement draws attention to the fact that wherever gold coins can be freely purchased they command a substantial premium over and above the value of the metal of which they are made. In the case of sovereigns that premium has recently been about 20 per cent. A prize of this magnitude has naturally attracted the attention of counterfeiters who, it should be added, have produced full weight coins of the desired degree of fineness, but have nonetheless infringed the exclusive coinage rights of the Royal Mint. Better Prospect, for Gold

Although 1958 is unlikely to see a general return to gold currency, it looks like being a much better year for the cause of gold in general. The free world has just emerged from a period of 12 years of post-war inflation. These years have been a meagre period for the gold mining industry. Its output may have risen but costs have risen, too, and the profit margins of gold mines have been crushed between these rising costs and a world price expressed in terms of dollars which has remained unchanged since 1933. It is an interesting paradox of gold that whereas the metal itself Is widely regarded as a hedge against the perils of inflation,, gold shares tend to fare badly in such a period. Within the last few months the economic climate has changed. Commodity prices have fallen and the world would seem to be set for a period of modest business recession and continued fall in the general level of prices. Those are the circumstances in which the gold industry finds a silver lining to the prevailing clouds. This change in the situation is coinciding, insofar as South Africa Is concerned, with the coining into production of an extremely promising galaxy of new mines which have been developed in the Far Western extension of the Rand and in the Orange Free State. In a generally overcast stock exchange, the gold share market, so long without a friend, has recently stood out as a beacon of cheerfulness. There are very solid reasons for believing that this will continue to be the characteristic of the market in the months to come.

PoMble Prjoe>lacreas« Beyond this specific market factor, it is also permissible to question whether 1958 may not enhance the chances of an increase in the world price ,of gold. It

is again a paradox of the gold situation that the prospects for such a measure of assistance improve at the very moment when, on the deflationary argument and the probable fall in costs, the industry is already feeling some relief from the strains that have oppressed it for the last 12 years.

The United States is sliding into a business recession which at present is modest but which may have considerable accumulated impetus behind it. In those circumstances the American authorities may think better of the project of raising the dollar price of gold than they did while the United States was still fighting inflation and while the authorities were, therefore, convinced that by putting up the price of gold they would merely be stoking up the fires behind these inflationary pressures. There may as yet be no indication from Washington or New York of a major swing of official American opinion on this subject But there is, a growing recognition among American authorities of the inadequacy of the world's gold reserves. An American banker has recently pointed out that if all the short-term foreign money now invested in dollars were to be withdrawn, the United States would be left with insufficient gold to honour the statutory reserve requirements. That observation suggests that a little gleam of undersanding is being cast on the fundamentals of the gold problem. Management Net "Scientific* It is also being asked whether there is any possibility of the return to a genuine gold standard in the world. The so-called managed currencies with which we have lived since the 1930's have behaved so as to arouse considerable demands for a return to something more automatic and less subject to human frailties. When the world began to abandon the gold standard it was in order to embrace what was then called "scientific management,” designed to ensure stability in the purchasing power of the currency, a stability which metallic standards had allegedly failed to secure. The management has not been "scientific." It has always tended to give the benefit of the doubt to inflation. It has undoubtedly helped to maintain full employment, but it has also done this within the context of a chronic erosion of the purchasing power of money. In consequence there is in the world today a growing demand for a return to some of the disciplines of a metallic standard. Few countries, however, have the wherewithal to satisfy that demand. In Europe, Germany is. paradoxically, the only country able to afford the luxury of even contemplating such a move. The coining of gold has been resumed in Germany and traffic in gold has been completely freed. It is, however, impossible to put .gold into genuine'--circulation, 'because - the premium which gold coins command is such that the free markets of Faris, the Middle East, and Zurich act as a constant magnet, drawing to them any gold which may be put into circulation in Germany. There has also been talk of South Africa trying to resume gold circulation, but for the self-same reasons that project seems doomed to failure.

This premium on gold coins is a measure of their scarcity and also of the true value which the world at large places upon gold. It focuses attention once again on the inadequacy of the available supplies of gold in the world. That artificial scarcity could be remedied by allowing gold to find its true level of value—a level which would be appreciably higher than the present official price of 35 dollars an ounce and would reflect the general decline in the value of paper money which has taken place since 1933 and, particularly, since 1939. During this period the world price of gold has been held stable and isolated from the successive waves of inflation that have been beating upon us. World trade la suffering from the consequent shortage of monetary reserves. A period of business recession will drive that fact home.