The New Gold Rush DISTURBING EFFECT LIKELY TO PERSIST

Press, Volume XCIX, Issue 29353, 4 November 1960, Page 14

The New Gold Rush DISTURBING EFFECT LIKELY TO PERSIST

IBv

"LYNCEUS"

of the “Economist"!

(From the -Economist" Intelligence Unit)

London, October 24.—There is universal significance in the recent turmoil in the gold market, where the price has been lifted far outside the normal margin of permitted fluctuations from the official parities. When that happens it is a sure sign that a wave of distrust is sweeping over the currency systems of the world. Distrust of currencies inevitably leads to a rush for gold, not only by those private individuals who have the facilities for purchasing the metal but also by central banks and monetary authorities, many of whom have painful memories of losses suffered by holding part of their reserves in currencies that were subsequently devalued.

The world no longer operates an orthodox gold standard. But gold is still the means through which ultimate balances of international payments are met. It is also the yardstick by which • currency values are measured—through the parities notified with the International Monetary Fund. For much of mankind it remains the ultimate repository of value and of savings. When, therefore, the price paid for gold rises well beyond the official parities, as it has recently done, the whole structure of monetary values and of exchange relations is brought into question. This is a matter for serious concern, and it has been regarded as such by the monetary authorities of the free world. Run on the Dollar

It is true that this is not the first occasion on which the free price of gold has moved beyond the normal range of the official parities. In the early post-war years the free market price rose to nearly 50 dollars an ounce; but the conditions that prevailed at the time were in no way comparable with those of 1960. There was then no organised free market. Such a market may be said to have been reborn with the reopening of the London bullion market in 1954.

Since then, the fluctuations in the price of gold expressed in terms of dollars have remained exceptionally narrow until September of this year. Between 1954 and mid-1960 the quotations moved between 34.86 and 35.16 dollars—well in reach of the official price in the United States which is 35 dollars an ounce.

The first sign of a break through the official parity occurred during September of this year when European central banks, with the Bank of Italy in the van, were converting into gold the large amounts of dollars that were being earned by Europe as a result of current and capital transactions. These purchases, mostly channelled through the London market, carried the price to 35.25 dollars, which, after making generous allowance for shipment charges, could be regarded as the gold export point from the United States. Until mid-October the position could still be regarded as held within the range of normality. A Wave of Demand

The actual break-through occurred on October 18. when the London market was swamped by a wave of private investment and speculative demand for gold. This demand was so greatly in excess of supplies that within two days it carried the price to a peak of 41 dollars an ounce and caused such disarray that the dealing margin, which usually is expressed in fractions of a cent, was at one time as much as 2 dollars—the price quoted by dealers being 38 to 40 dollars.

Behind this rush for gold lay the impressions made on a large number of foreign visitors to the International Monetary Fund

meeting in Washington towards the end of September. They brought back from that visit the view of a deepening depression in the United States and the conviction that whoever might win the Presidential election, the new Administration would probably launch a more expansionist antirecession policy. This, however desirable in the light of the domestic economic position would be calculated to add to the strains on the United States balance of payments. The delegates at the Washington meeting do not appear to have been over-impressed by the official statements of the American representatives regarding the position of the dollar. The resulting purchases of gold on foreign account were supplemented by some purchases on private American account. These came to the London market via Swiss banks, but were also evident in the Toronto market, where considerable American purchases may have been prompted by the indications of public opinion polls that the Democratic candidate is likely to win the Presidential election and by assumptions that the Democrats will, in that event, be true to their “soft money” reputation. Old Assumptions Disturbed This divergence of the gold price from the official dollar parity is made possible by the fact that central banks are not legally obliged to sell gold at fixed prices. The United States Treasury is obliged only to sell to foreign central banks, and even then only “for legitimate purposes.” Other central banks are required to support their currencies within the range of their parities with the dollar; but that does not prevent their currencies moving outside the normal range of their own gold parities, since, in the circumstances recently prevailing, all currencies were depreciating together in terms of gold. The denials of any intention to devalue the dollar have had some reassuring effect; but it is unlikely that after this considerable flurry in the gold market the world of international currencies can go back to the status quo ante. The tacit and unquestioned assumptions about the permanence of exchange rates and the relation between gold and currencies have been disturbed. The echoes of recent events are likely to reverberate and probably grow louder in the months to come.