Bullion dealers betting on exchange-rate uncertainty

Press, 2 June 1979, Page 19

Bullion dealers betting on exchange-rate uncertainty

B:

ALEX C. FOX

Gold prices on Europe’s bullion markets on Wednesday fell from the record high, but dealers expect a run of fresh records, NZPA says.

In Zurich on Monday the metal was traded up to aj record price of $U5277.625j an ounce, before falling to $273,625. In London the ’closing-price was $273 an ounce.

But by Wednesday the price had fallen to $269,875 tn Zurich, and $270,625 in London, in response to economic and monetary reports. Dealers in Europe said that there was speculative selling, as well as profit-tak-ing, and the New’ York market seemed to take the lead in deeming gold overpriced, but they stuck to their predictions of a medium-term uptrend in the price of gold. However, buyers on the London and. Zurich markets became more wary of gold on reports of increased disStates trade deficit, and increased discount rates being count rates being offered by

French, Dutch, and Belgian central banks.

Sharply higher imports of oil and cars, drove the' United States trade balance more deeply into deficit in April, the Federal government reported on Wednesday, and this could cause the dollar, and gold to move as they did in 1978. but that depends on how much longer West Germany and Japan will support the dollar.

The deficit for April of $2150M was the largest since January’s S3IOOM. In the first four months of this year the United States trade deficit amounted to 57370 M, compared with a deficit of 513.270 M in the first four months of 1978. Government officials expect a total deficit for 1979 of about $23,500M, compared with a deficit of $28,500M in 1978.

The latest report showed that the key to the increase in imports was a nine per cent rise in oil shipments to 54050 M, and a 54.5 per cent rise in car shipments to SIOSOM. The higher imported-oil

bill was because of an ir.-j creased number of barrelsj imported, and rising oil prices. In 1978 the size of the deficit was a major factor in the decline of the United States dollar against other major reserve currencies, and this decline helped raise 1 the SUS price of gold. However, this year European industrialised nations, and Japan, are much better organised to resist the natural decline of the SUS, as a result of the continuing large deficit, so its fall is much less certain than in 1978.

Recent reports on the rising gold price have te-

marked on the fact that the SUS has not been falling against other currencies at the same time.

These reports suggested that gold, and strong currencies, including the SUS, were being regarded as equals for the purpose of settlement of debts between countries, and no doubt they were.

And. in the last day or so, there has been talk of a return to the Gold Standard — a system of monetary control, which restrains inflationary policies of Governments.

The price of gold in recent weeks has risen in response to these two factors, as well as the drop in the amounts offered at auction in the United States.

But the most convincing reason for the rise remains the preference for gold in times of uncertainty over exchange rates, which seems to have emerged again with the latest United States trade statistics.

The size of the expected United States trade deficit for 1979. although 17.5 per cent less than the actual deficit in 1978, is still big enough on its own for in-

flation to persist without the effect of higher oil prices.

And it is not certain that the actual United States deficit for 1979 will be reduced because more than half of its value so far this year is in oil import costs, and the volume of imports has not slowed. Another round of exchang e-rate manoeuvres might have just started with the news of the size of the expected United States deficit, and the Administration’s plan to subsidise further oil imports from other than O.P.E.C. countries. On Wednesday in Tokyo, where the busin’ess-day ends before Europe’s begins, the United States dollar closed higher at 221.925 yen up from 221.375 yen on Tuesday, but it spent most of the day falling back from a higher opening rate. In Europe, dollar-selling I was stimulated by the French, Dutch, and Belgian central banks raising their discount rates, and by rumours that Germany might do the same, to attract investment in European currencies, rather than in the dollar.

The pound advanced half a cent in London to $2.05585.

Belgium has raised its bank rate from 7 to 8 per cent in a move to counter the weakness of the Belgian franc in the European Monetary System (E.M.S.)

The E.M.S. was set-up earlier this year to protect member nations’ trade from fluctuating exchange rates. Belgium has had to intervene in the currency exchange market to prevent its currency from piercing its prescribed lower limit against the West German mark.

Belgium has complained that its currency was weakening, because West Germany was intervening in foreign exchange markets to keep the mark strong against the United States dollar. So at the moment the situation is this: the SU.S. should go down, or the mark and yen should rise to remove trade imbalances, but Japan and West Germany continue to resist this, saying the fault is in United States oil importing.

The United States won’t devalue, officially, and won’t reduce its oil imports so the deficit remains high and puts pressure on the dollar in the foreign exchange markets, which is being relieved by mainly West Germany, and Japan.

On the sideline are the bullion dealers betting that gold will rise again because of the uncertainty created in the currency markets by the struggle over trade between the United States, West Germany, and Japan.