Silver In The News U.S. REMOVAL OF PRICE RESTRAINT

Press, Volume C, Issue 29706, 27 December 1961, Page 8

Silver In The News U.S. REMOVAL OF PRICE RESTRAINT

(By "LYNCKUS" of the “EconomtsC’l (From the "Economist" Intelligence Unit)

London, December 5. Speculation in silver received fresh impetus late in November, when the United States Administration pulled out the peg that had for years set the effective limit, to the price of silver all over the world. Because silver still forms part of the backing for the note issue in the United States, and because the Americans acted soon after a widely publicised loss of 300 million dollars' worth of gold to Britain, the events in the silver market have been linked in some circles with the general "weakness of the dollar." The United States, it is said, is evidently short of both precious metals simultaneously. In fact, the link between these two metals is now barely more than a historical one. Silver is no longer a monetary metal in any significant sense, and the events of late November have reduced its monetary status still further. Silver is basically just another commodity, though the monetary connotations that exist on the fringe do complicate the situation. Excess Demand World consumption of silver has exceeded current world production for many years; and only the artificial prop which was provided by the United States Treasury, and which has now been removed, prevented the price from rising in the normal way. The prop, comprising the commitment by the United States authorities to buy silver at 90} cents an ounce, derived from concessions to producing interests in the far western States made by President Roosevelt in 1934. Because silver bought at this price was written up in the Treasury's books at 1.29 dollars as backing for small denomination notes (“silver certificates"), this left room for the creation of a substantial free reserve, which was used as a buffer stock to feed the excess of world consumption over world production. Production of silver has remained almost stable at about 200 million ounces a year for the last five years or so Mexico was the largest producer with 44 million ounces in 1960; the United States was second with 39 million ounces; then came Canada, Peru, and other Latin American countries. World consumption, meanwhile, has been increasing steadily, from about 275 million ounces in 1956 to more than 300 million ounces in 1960. One factoi is the increasing use of silver in industrial processes, notably in electronics and photography In the last few years, this has been accompanied by a return in a number of countries (including France. Italy and Austria) to tin use of silver in coinage. The gap between consumption and production has thus been substantial At first it was filled by de-stocking in countries other than the United States. Britain, among others, took the silver out of its coinage after the war in order to prepare to repay the silver borrowed from the United States under lendlease arrangements. More recently, China has been gathering up all the silver it can lay hands on, and has been selling increasing amounts in Western markets Stocks Depleted But m the last two years these special sources have not been sufficient to bring world supplies up to demand and the upshot has been a major rundown in the United States’ free stock. At the end of 1959 this stock was 174 million ounces. On the eve of the suspension of sales, it had been reduced to 32 million ounces after falling by about 219 million ounces a day Il bad been clear tor some months previously that this tap must soon be closed, and when this happened, the price of silver rose, as the speculators had expected. It

did not, however, rise very far—by 9 cents to just over 100 cents in New York. Because at the disparity between world supply and world consumption, and because of the uncertainty over future Chinese sales, this is modest indeed. The explanation is twofold In the first place, any substantial rise in the price of silver would encourage the reopening of silver mines now closed. The critical figure in the United States is said to be about 1.10 dollars an ounce. A price increase would also add to market supplies by making it

worth while to melt down existing silver coinage. In the United States the critical figure here is 1.29 dollars an ounce, but in other countries melting down of national currency would in most cases be illegal, but this "parity" figure is a significant one nonetheless. Further Change Second, the change in silver practice announced by the United States Treasury was not exclusively “bullish” for the silver market and silver producers. For besides suspending its 90‘i cent silver sales, the United States Administration also indicated that it intended to free the silver that is held as backing for the note issue. At present about 17 billion ounces is held in this form. The amount, it will be noted, is very large even in relation to the annual "gap" of about 100 million ounces between world consumption and production. There is no suggestion, of course, that this silver is to be unloaded on to world markets. But the United States may fill its own coinage requirements from this source—and this coinage demand took up about 46 million ounces last year. The representatives of the western mining interest have therefore had two views about the Administration's action. Nor does the gradual ending of the silver backing for United States currency necessarily imply that there will be an equivalent increase in the necessary gold backing, for it seems that the United States Treasury aims to incorporate the old silver certificates into the issue of the Federal Reserve, which is backed by securities rather than metal. Those who have been dragging up the ghosts of bimetallism seem to have been moved by colourful history rather than by present prospects.