The Press TUESDAY, MARCH 19, 1968. Two Prices For Gold

Press, Volume CVIII, Issue 31632, 19 March 1968, Page 14

The Press TUESDAY, MARCH 19, 1968. Two Prices For Gold

The establishment of two markets—and hence two prices—for gold is the only certain consequence of the momentous conference of central bankers held in Washington during the week-end. The Federal Reserve Board will no longer sell gold without restriction to the central banks of other countries; future sales, still at SUS3S an ounce, will be for monetary purposes only. The co-operation of the United Kingdom, Germany, Italy, the Netherlands, Belgium, and Japan in this arrangement is assured by their agreement in the communique issued in Washington. The support of most of the remaining members of the International Monetary Fund may be taken for granted.

Yet this massive show of strength by the world’s wealthiest nations may not be sufficient to still the speculative hoarding of gold in the hopes of a devaluation of the American dollar. The most convincing demonstration of American confidence in its currency would have been to continue supplying gold from the Federal Reserve Board’s reserves in whatever quantities might be required to hold the free market price at $35 an ounce. That the United States suspended this obligation suggests that it feared its $12,000 million worth of gold would all end up in speculators’ hoards. The decision is not, however, an unqualified success for the speculators for they can no longer hope for an early increase in the official price of $35 an ounce.

For at least a fortnight, until dealings are resumed on the London gold market, the world’s main bullion market, the outcome of the Washington meeting must remain in doubt. In the meantime, dealings on some of the minor markets can merely give an indication of the trend in the demand for gold. Some of last week’s buyers may be forced to sell their holdings for cash to meet current commitments; their place may be taken by other speculators able to hold gold for weeks or months. Industrial users of gold, who take up to half the annual output of the world’s mines, comprise the biggest part of the non-monetary demand. Many of them can afford to pay more than $35 an ounce for gold because silver and other substitutes have become dearer while the price of gold has been pegged.

Buying pressures appear to outweigh the force of selling just now; a price of more than $35 an ounce on the free market can therefore be expected over the next few weeks or months. As long as the price remains above $35 central banks will be unable to add to their stocks except by purchasing from the American official reserves. Sooner or later America would be forced to reconsider the dollar-gold exchange rate—the options open to it fewer by one than before last week-end. In the meantime, America and its partners in the now-defunct gold pool must attack the fundamental cause of the run on gold: loss of confidence in paper currencies.

For the United States this must mean a belated increase in tax rates: for Britain, inevitably, a tough Budget today; for the rest of the trading countries of the West tighter monetary and fiscal measures and a corresponding reduction in international trade. This year’s sacrifices will not be in vain if the dollar and the pound survive until the International Monetary Fund’s special drawing rights are available, probably towards the end of next year. This scheme to increase international liquidity is, in effect, a part-substitute for monetary gold. As a step towards demonetisation of gold, the upheaval of the last week need be no more than a temporary phenomenon; but if it marks the beginning of the end of “ managed ” international currencies, world trade and prosperity will suffer grievously.