The gold glitter
Nicholas Davenport
If you were a greengrocer and had two million potatoes to sell you would be an awful fool to announce the fact a month in advance of your ,sale, because you would simply Knock the market price of potatoes down flat. This is what Mr William Simon, the US Treasury Secretary, has done with the price of gold. He has given notice that he will sell two million ounces of gold on January 6 and immediately the price of bullion fell from $185 an ounce to $170. (It has since recovered.). But what is $30 million to
the American Treasury? They can Print $1,000 million in a few seconds. Mr Simple Simon had, of course, a tactical advantage in mind for his Treasury department. Congress
having lifted the ban on US private citizens owning gold bullion as from December 31 he did not want to see such a rush into gold as would worsen the American balance of payments now strug gling to return into surplus. This Year the import volume of gold in
the form of coins had cost the US Treasury some $1,000 million. More
over, American citizens had bought a lot of gold illegally in
Switzerland which is held in the
Swiss banks. Mr Simon is hoping that these nervous creatures will sell their illegal gold and buy it back
legally in New York to the immecliate gain of the US balance of Payments. Further, he said that the Proceeds of the gold auction would be used to fund certain Federal Programmes and so reduce the !Mount of cash the Treasury would 1,!ave to raise in the capital market, hUtno doubt, with a wink or two at as audience he added that the Manoeuvre would also be a practi cal step forward towards the Atnerican objective of ending the ()M in,ei al monetary role of gold in the it..-ernational payments system, so Lat gold may be treated in all T'v.sPects like any other commodity. sc! emphasise this point Mr Simon L,aid that the gold auction would be Aarried out by the General Services lttofl — the body generY used to dispose of surpluses CoMn the US stockpile of key nItnodities rriBefore I proceed with this argu ment 1 would like to congratulate iky friend and fellow contributor `64r" Charles Stahl, the editor of preen's Commodity Services, who haohPhesied that all this would the'pen — his last broadsheet had Goi title 'Waiting for the American d Sucker — and had advised his readers to sell gold when it topped $180 an ounce and buy it back when it dropped to below $120. His general argument is that there is an awful lot of gold above ground in the vaults of the central banks and that if any of them started to sell in the free market there would be a sharp collapse in the price. This is all very true. And I agree with him that there was something indecent in the hectic preparations of the American financial houses waiting to cash in on the gold rush by advertising "baby bars of gold" and fancy gold coins and gold wafers. The First National City Bank of New York actually built a-new vault to hold up to 51/2 million ounces of gold.
But where I differ from Mr Stahl is in his taking Mr Simon's controversial line and treating gold like any other commodity when it is not. This I regard as a very dangerous presumption. Already we have the socialists trying to overturn the capitalist system. Then we have the Marxist-Maoist revolutionaries trying to overturn the democratic system. Now we have Mr Simon trying to overturn what is left of the international monetary system without saying a word to his fellow central bankers. Which is another proof that whom the gods would destroy they first make mad.
Everyone should know that the world monetary system, as Mr Lever has lately been telling the Shah of Iran, is threatened today with collapse by the quadrupling of world oil prices which is putting an additional burden of $60,000 million this year on the internatiOnal payments ' of oil importing countries. To make monetary matters worse, there has been a world slump in the market values of bonds, shares and property assets which has caused some important banks to fail on both sides of the Atlantic and others to seek help from their central banks. It is therefore vital for the central banks to see that their own assts do not depreciate but maintain their full market value. As their assets consist of so-called "convertible" currency notes and gold, which is still valued in their books at -the "official" price of $46 an ounce, the sensible course would be to write up their gold holdings to a realistic market value of say around $170 an ounce. This would make them better trimmed to come to the help of their national banks in trouble Incidentally, there will be many more banks in trouble in our own country very soon if the Government does not immediately unfreeze commercial and private rents. The main collateral for bank lending is property and it is sheer madness to make property unsaleable if you want to preserve a sound banking structure.
What made Mr Simon's denigrating remark about gold so presumptious and outrageous is that the French and some other European countries with big gold holdings had never agreed to give up a role for gold in the -world's monetary system. The French would, indeed, like to see a common European currency based on gold. Even Dr Burns of the Federal Reserve felt obliged to snub Mr Simon by saying that "since the precise role of gold in the international monetary system is yet to be determined,it would hardly be desirable to dispose of any sizeable part of our reserve assets."
Americans have, always resisted any increase in the price of gold. They knew that if gold could be phased out of the monetary system the dollar would take its place. So they went on piling up huge deficits on their balance of payments until the Euro-dollar market reached the tremendous total of over $80,000 million. These paper dollars have been used to buy up good wealth-creating assets to the great annoyance of European governments. It made de Gaulle so hopping mad that he withdrew all the gold he could from the United States.
It is now recognised that the great fountain of inflation which is spilling over the developed industrial world flows from two springs: first, the full employment policy adopted after the war which gave the bargaining power in wage negotiations to the organised trade unions; second, the failure of Western governments to maintain and manage sound money because they have found it so easy to expand government expenditures .under social and political pressures by just printing paper notes. The inflation has now reached such an alarming rate — our own will top 20 per cent next year, according to the National Institute — that people have become frightened of the future and feel compelled to buy gold coins without knowing that gold is any real hedge or any measure of real value. Instinct tells them that when the industrial world about them seems to be crashing into ruins, it is good to bury a few gold coins in the garden if they cannot bury themselves until the crisis is over. They are probably right.
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