GOLD BUYING PUZZLE MODERN VERSION OF A GOLD RUSH OPERATES IN LONDON

Press, Volume CIV, Issue 30829, 14 August 1965, Page 14

GOLD BUYING PUZZLE MODERN VERSION OF A GOLD RUSH OPERATES IN LONDON

(Reprinted from “The Times.’’) The London gold market is having its busiest time since the Cuban crisis, and the dollar price of gold has reached its highest level for four and a half years. The Bank of England is selling tons of gold to try to control its world price on behalf of the world’s leading central banks. China has been busy buying gold in London. The French have been switching millions of their dollar holdings into gold this year. So have other countries, though more discreetly. Middle East and Far Eastern speculators, normally the main-stay of private demand for gold, have had their appetite whetted once more. Even in Birmingham the gold itch has been noticed by loc-al assayers.

That is an interesting situation. Who wants gold, and why. And why should the world’s major market be in London, when none of us here can legally hold it (there are one or two small exceptions like collectors, dentists etc.), and when, according to James Bond and his ilk. it is all so much easier in Macao, Hong Kong, Saigon, and other points east? There is no need to travel so far, of course, to find out why people hoard gold. Just across the Channel the French peasant and others of a much higher status in Paris) have been keeping small gold bars specially made for the purpose under their beds for generations. At one stage a few years ago it was estimated that gold holdings by Frenchmen were equivalent to the whole of the sterling area’s gold reserves. Few in Paris cared to deny it. If the French franc has been devalued over a dozen times since 1914, if French prices have gone on rising, if invasion has had to be faced twice in a generation, what better than gold to keep its value, to carry easily and to hide away from prying eyes, whether official or otherwise? The same reasoning lies behind the gold buying throughout the Far East and Middle East, where fears about money and prices are far more deeply embedded than in Europe. French Call All this explains the continuing private demand for gold. It does not satisfactorily show why there should have been a marked increase in recent months and weeks, and why governments should have been doing more than their share of gold buying, too. In spite of all the sophisticated monetary techniques evolved since the war. gold payments are still the only widely accepted method of payment among governments. A third of the world’s trade is financed in sterling. Nearly a third of the official reserves of governments are made up of dollars or pounds. Yet in the last 12 months both these major currencies have come under a cloud of suspicion. The pound’s troubles are still with us. Both traders and governments have reduced their sterling holdings in London until confidence is restored. The dollar was under a similar, though far smaller, cloud last winter. President de Gaulle, for one, made it

pretty clear that France was unwilling to receive dollars, instead of gold, for American deficits in future. More than that, France had every intention of asking the United States to change France’s dollar holdings into gold (they once amounted to 1500 m dollars). He called on other countries to do the same. Many of them, including Western Germ.ny, had been doing so quietly for some time.

China’s Motives

President de Gaulle’s call for a return to the gold standard—he really meant a return to gold payments among the major countries—had a simple aim: to undermine the post-war dominance of the American dollar. Although President Johnson was quick to reply by tightening up the outflow of dollars for investment in plants and factories abroad, the French gesture did not go unnoticed. Since it was accompanied by the continuing rumbles of a sterling crisis, it was hardly surprising that several countries began to wonder whether the share of gold in their reserves had become too small for comfort. Academic suggestions demonstrating that the world might soon run short of international money, and that one of the answers to the difficulties might oe to double the dollar price of gold, left a strong impression that the buying of gold might turn out to be profitable, too. Whether this was the reasoning behind China's recent gold purchase is anyone’s guess. London estimates put them at something like 80 million dollars (just under £29 million) so far this year. They could have been prompted by the escalation of the Vietnam crisis as much as by broader views about world currencies. China tends to trade with sterling by way of Hong Kong, and may simply want to keep her financial resources freely available in a handier form than sterling. Much the same kind of Chinese tactics (selling sterling for gold) were followed during the Suez crisis. But China has not been alone in buying gold. Spain has also been mentioned as a buyer in recent months, and so has Burma.

The Bank’s Pool

That the business has been concentrated in London has less to do with the sterling crisis than with the fact that the bulk of the world's gold turnover now passes through the hands of the five firms of bullion brokers who meet every morning at Rothschilds’ new offices in New Court. From the morning in 1954 when the London gold market reopened again after the war, most of the major deals have returned to London. Hong Kong, Macao. Saigon, and all the other eastern centres are useful for local hoarding, but for big business none of them can now rival London. This brings both snags and advantages. It means that when demand for gold is prominent, as at present, the fact quickly reflects against the value of the pound and the dollar in one of the world's main financial markets. At the same time it enables the Bank of England to move in quickly to offset speculation at a moment’s notice. This is precisely what has been happening on a growing scale in the last few

years. It has been particularly so in recent weeks. Since 1961 the Bank of England has been operating a substantial gold pool on behalf of other leading central banks in Europe and North America to keep the dollar price of gold reasonably stable. Each central bank provides the Bank of England with a quota of gold to sell, as required in the market, in order to maintain this stability. In addition, the Bank of England also acts as : the main selling agent for the. South African Government—the world’s largest producer of gold. Since Russia, the second largest producer of gold in the world, also sells most of Its surplus gold in London, the supply of gold either at the command of the Bank of England or availalXe to meet sudden speculative demands is considerable. It also means —and this is important to realise at present—that the fact that the Bank of England is having to use tons of gold to control the market does not imply that Britain’s gold reserves are being depleted by the same amount. The bank is acting as the agent of the biggest official gold syndicate in the world.

Ironies Not Lost

Thus what takes place at 10.30 each morning at the socalled “fixing" at Rothschilds, round a table with each bullion firm wielding a small Union Jack, is the result of world-wide gold deals. Individual orders are indicated by the five brokers, though whether they originate from Russia, China. Kuwait, Spain, or South America no-one knows. The same is true of Rothschilds, who act as broker to the Bank of England. Are its orders from the bank itself, the South African central banks, or the syndicate of central banks? Noone can guess. But the ironies of some of the underlying situations are not lost on those present. France may have done as much as anyone to start the modern version of a gold rush. She is also a member of the central banking syndicate attempting to control the price. As for the spectacle of Russia busy selling gold in London, and China busy buying it, rather than dealing direct, the London brokers who make all this possible are hardly going to quibble at good business, and a nice commission however narrow, whatever the international tensions lying behind it.