The Gold Conundrum
Nicholas Davenport
A funny thing happened to gold on my way to the City — via Majorca. It jumped 40 per cent in price on the free market. This was in a matter of weeks and it caused me to turn over the pages of the Financial Times for a month or so,to find out exactly what had made it behave like a grasshopper.
First, gold is no longer functioning as part of the monetary system. For the time being there is no world monetary system — it was killed when America suspended convertibility of the dollar in 1971 and the IMF might as well close its doors. It is no longer issuing any more SDRs — it stopped when it had issued $9.3 billion worth — and it is no longer acting as a lender of last resort to monetary authorities. Central bank ' swaps' are taking care of any need of that sort. Since March the world's central banks have been floating their currency exchange rates — the EEC jointly excluding the UK, Italy and Eire — and have no need to turn to the IMF.
It is therefore rather silly of Mr Anthony Barber to urge Mr Jeremy Morse's Committee of Twenty Deputy Finance Ministers to have their scheme of monetary reform ready to present to the September meeting of the IMF in Nairobi. They were supposed to devise a new system of " stable and adjustable " exchange rates and decide what monetary role was to be played by Gold. This is politically an impossible task seeing that the US and the EEC are at sixes and sevens on trade and monetary questions and that no government is prepared to hand over its econo
mic sovereignty to an international body while it is battling with demand-pull or wage-cost inflation.
The Nairobi jamboree will, of course, take place — there is the World Bank meeting to be held, which, incidentally, should now be divorced from the IMF meeting for decency's sake — and the delegates have to elect a new Director General to replace M. Paul Sweitzer. Mr Callaghan's name has been put forward and he would be an excellent choice during this political and non-monetary phase of the IMF. It was during his tenure tit thd Treasury that the SDR scheme was carried through with his enthusiastic backing. And no one would grudge Jim $50,000 a year tax free now that he has become a farmer.
The central banks continue, of course, to hang on to the gold portion of their reserves, which has become a deeply frozen asset, and as the official monetary price pas been raised from $35 to $42.2 per ounce gold holdings must now amount to over $5 billion out of a total reserve of over $150 billion. But being members of the IMF they are not allowed to sell their gold on the free market which is a mercy for the ' bulls 'as they could cause a mighty slump in the price — and they have to sit back while they watch Russia and South Africa selling the new output from their gold mines at the present price of $120 per ounce. The free market price has risen steadily from $90 in April and touched $130 last week.
The reasons for the sharp rise in the free market price of gold are plain to see. The output from the South African gold mines is going down — in 1972 it fell to 908.7 tons from 975.7 tons in 1971 — and is expected to continue to decline as lower grade ores are mined and older mines are worked out.
I should add that only Australia is increasing its small production and that Soviet Russia can withhold or increase its supplies at will. To pay for its grain imports it sold 200 tons in 1972 against sixty tons in 1971. At the same time demand for gold on the free market is increasing for two reasons. The commercial demand for jewellery, dentistry and electronics is slowly but steadily rising; the traditional hoarding demand from the Middle East and India is also steadily rising as the per capita wealth of these countries increases; and finally the demand for gold as a store of value from individuals in the US, Europe and Japan, who are scared of holding their wealth in paper during a raging inflation, is pitching sharply upwards. This last demand is admittedly very specula tive and has been accentuated by the recent Weakness of the dollar following on the Watergate scan dal. No attempt has been made by the American monetary authorities to intervene in the market and support the dollar — much to the annoyance of the French who have pressed them to do so -and when Mr Volcker, the Under-Secretary of the US Treasury, was asked about the jumping price of gold he curtly told a reporter that he should study the commodity news. For the Americans gold is now a commodity and they are not interested in its price.
The Senate has asked President Nixon to allyw American citizens to buy gold bullion, first because it might induce a lot of American money which has flown into Swiss banks (and gold illegally) to return home, secondly because it is reasonable in a free democracy to permit savers to buy gold as a store of value if they are scared of their domestic inflation. Japanese citizens have been allowed to buy gold within certain limits and, of course, British citizens can buy goid coins at any time through the City bullion merchants. The post popular choice is Queen Elizabeth sovereigcs, which are at the lowest premium over their gold content, and Krugerrands coins which are about 99.9 per cent gold. The South African mint struck 503,500 Krugerrand coins last year which were exported to Germany, Switzerland, Belgium, the UK and Let no one suppose that these gold coins have been mined and minted by ill-treated black slaves.
In the last twelve months • the earnings of black workers in the gold mines have increased by 42 per cent and Mr Harry Oppenheimer, the head of the great Anglo American group, has just stated in his annual report that his ultimate goal is "a uniform wage scale for black and white based on objective
criteria." I remember saying in the special South African supplement 1
wrote for The Spectator three years ago that the greatest gold mine they possessed was to push up the standard of living of the black workers. This at last is being done, although the Afrikaner govern ment still continues to cheat the black population by denying economic viability, much less boom, to the Bantustans.
With gold production costs rising sharply gold shares have lost their investment attraction. As a hedge against inflation gold coins, even after their sharp rise, are probably the best buy as a store of value. But it remains a speculation while a new world monetary system' is being debated by a bunch of academic 'experts.' I do not believe that the Americans will ever go back to the monetary use of gold, even if they quadrupled the official price of $42.2. The world will continue to be divided and probably the Europeans, which are jointly floating against the dollar,. will devise their own monetary clearing system and write up their gold reserve to the free market. price of gold. This might temporarily depress the market price but when we contemplate our runaway inflationary world, which our Labour leaders, ignorant or malicious, refuse to curb, it may not be nonsense to suppose that gold will rise eventually to $200 per ounce. A real store of value should be at least ten times higher today than it was in the nineteen twenties.
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