The Gold Pool CO-OPERATION TO PROTECT DOLLAR

Press, Volume CI, Issue 30007, 17 December 1962, Page 12

The Gold Pool CO-OPERATION TO PROTECT DOLLAR

I By

"LYNCEUS"

of th* “Econ<znnst'’l

(From the "Economist'' Intelligence Unit)

London, November 21. Have the monetary authorities of the West won their battle against the gold speculators? It is too early to be sure. But it seems that the collective action taken by the leading central banks to counter speculation in the gold market has been unexpectedly successful The beginning of that cooperation was seen a little more than two years ago. after the gold problem had been brought to a crisis by the rocketing of the London price to 40 dollars in October. 1960—a premium of a seventh above the official price. This implied an effective devaluation of the American dollar in terms of gold. Lt was then realised by the Americans that the London market could no longer be ignored. The Bank of England, which manages that market, had for some time been arguing that in the special case of gold a rising market price actually increased private demand, because it brought the prospect that the official price might be forced violently off its peg. The corollary of this analysis was and is that speculation in gold can best be countered by meeting the speculative demand in full—and in excess. After the gold scare that October, the American authorities accepted this view, and agreed to supply gold to the Bank of England for support sales in the London market. Policy Vindicated

These sales “across the gold bridge” quickly succeeded in calming the gold market, and the policy of intervention was vindicated But this intervention still carried its cost, in the shape of the drain on the United States’ gold reserves. In an effort to shield the United States from the full brunt of supporting the gold market, leading European countries I agreed in the second half of 1961 that their central banks should form a collective gold pool This pool comprises, as has now become known in closer detail, commitments by the individual central banks to supply gold to a total, for all the countries in the pool, of 250 million dollars, as required for support operations on the London market. At the same time, the gold pool, which is managed by the Bank of England, takes all available opportunities to bring gold on the London market, other than that from South Africa in the form of newly-mined gold For the rest. European central banks agree to hold off the gold market individually. Thus their gold operations in London have largely been centralised through the pool At the end of each month, it is believed, the Bank of England notifies the other central banks of the month's “deficit"' or “surplus” in pool operations, and these gold deficits or surpluses are then settled with each country according to its quota in the pool Cumulative Deficit Under the present agreement, the pool continues functioning until the cumulative deficit—that is, the total amount that central banks have paid into it in gold over the months—has reached 250 million dollars. At one time last summer it was believed that this total had been passed, and that the pool was already exhausted. Doubts were therefore raised about the ability of the pool to deal with the very large speculative purchases of gold that were made on the two days at the height’ of the Cuba crisis last month Now it seems that these fears have been unfounded According to one reliable report, the cumulative deficit in the pool at the end of October was in fact no more than 80 million dollars. leaving the bulk of the 250 million dollars still available The explanation for this strength lies largely in the considerable purchases of gold that the pool has managed to make, and to some special reinforcements Certainly,

market commentators d.

seem to have been far wrong in judging that the gross volume pf sales by the pool may have been near the 250 million-dollar mark. They reached 100 million dollars in three weeks of July, and perhaps 50 million dollars m the two bad “Cuba" davs alone. But there have b<i u substantial offsets. The most recent, and most remarkable, was a large s,,i ■ of gold by Russia in the actual week of the Cuba crisis, which proved a great relief to the pool managers Then. during the dollar speculation of the summer, the United States itself put something into the pool. This was in line with the general understanding that European central banks should not be left to bear the whole brunt of support operations at times when the dollar was suspect in the markets. Finally, there may hat e been some relief from gold sales by Canada earlier this year, when its reserves were falling steeply. In all, the official measures taken in the gold market have been highly successful. This still does not leave room for complacency. Trouble could still arise if ’.he United States payments deficit widened substantially again. European financial cooperation cannot be taken for granted indefinitely. But at least at the technical level the gold pool has been an outstanding success.