Gilts and gold
Nicholas Davenport
hi. boom times — no one can say that the City is dull or boring when nearly every market
.
booming except gold — a money column largely writes itself. Last week I was giving a Pretty good estimate of the amount of gilt
edged stock which this improvident government would sell to the non-bank public in the
current financial year. I put it at £4,000 million — an unprecedented figure. Now I will have to raise it because the 'short' and the 'long' taPs' —
ECM million and £750 million — were suddenly exh. austed last week before the column was Printed. Now I would not be surprised to see ,e-5,000 million of stock sold to all of us savers before next April. The new tap stocks, which were announced ,last Friday, were another 'short' and a 'long' — t501) million of Treasury 9% per cent 1980 at 931/4
and £600 million of Treasury 13 per cent 1990 at
96 — which pleased the market quite a lot. Some astonishing rises have been seen, especially in the 'longs'. In one week Treasury 131/4 per cent ;997 (A) jumped 7 points and is now 97. The lower coupon stocks had more modest rises. The market should now pause for consolidation before moving higher. My advice to the Chancellor is'to stop issuing any more stocks with high coupons which rnonetise themselves all too rapidly. The conventional comment one reads is that if the government has to issue large amounts of 'tap' s.tocks to offset its huge borrowing requirement will have to keep interest rates high. This is a lot of crap. If the Chancellor wants to go on selling gilt-edged stocks to the public he must c.onvince them that market prices are going to rise further and that the rate of interest is going to come down. It certainly looks like falling. ',1":11e world recession is. slow to move and big business, having restored its liquidity, is not rti. stung to the banks to borrow. American interest rates are happily falling. The leading ,/"Unerican banks are cutting their prime rates ri_14-ther down to 7 per cent. Our own banks have cut their base rates to 101/2 per cent. If Mr Healey had real understanding of money he would stop pressing the financially Strong governments to reflate; he would urge them to make money really cheap. Business would then pick up, industrial investment Would revive and the price inflation would ...abate. In a world trade recession it is madness t`i? Pursue monetary policies which pauperise e businessman and endow the moneylenders. An Lfew good capital controls, which the Tories auandoned, would stop cheap money being exploited by the spiv and the speculator. I am, therefore, still bullish of the gilt-edged Market. If you can believe that Price inflation will be brought down to below 10 per cent then a.stook like Gas 3 per cent 1990/95 at 3434 to _Yield about 111/2 per cent to gross redemption is _very attractive, having regard to the enormous aPital profit which will eventually be secured. 1:,,or those who do not expect to live so long nsPort 3 per cent 1978/88 is ideal for the hira n,e,avy taxpayer. As I have said, a continued slit-edged boom will carry the FT industrial
share inaex on its back. It broke through the 400 level at the end of the last account and has now come back on profit-taking.
The only market which has seen no cheer is that in gold. This was to be expected in the dim light of the Jamaica meeting of the IMF finance ministers which was called to reach agreement on amendments to the IMF articles, on the floating exchange rate regime and on the partial distribution of the IMF gold. An agreement was, in fact, reached, thanks largely, it is said, to the efforts of our Mr Healey, but I cannot call it, as he did, "the start of a new era". It was the acceptance of a messy monetary reality. As a result gold fell to below $136 an ounce. I think it was the Times which said that gold has a past, a future but no present. That is truly the situation at the moment. It was originally proposed that the IMF gold holding would be reduced as to 25 million ounces by returning them to the central banks who had
subscribed the gold and as to 25 million ounces by sale by .public auction, the difference
between the market price and the official price of $42 an ounce being handed over to the developing countries. As about 71/2 million ounces would be directly transferable to the poorer countries the sale of the 171/2 million ounces by auction would produce, it was thought, $1,750 million over four years for the benefit of the developing countries. This is a laughable amount seeing that they will have a balance of payments deficit of over $30,000 million this year. And as neither the Bank of International Settlements nor any central bank is prepared to bid for gold at a public auction the proposal must be a joke. The only sensible and practicable thing to do is to hand over 25 million ounces to the BIS and leave it to them to dispose of it gradually to the central banks who would like more gold. The present IMF position is that not only has the official price of gold been abolished but gold has been divorced from the international monetary system. All this has yet to be approved by the US Congress and other member governments. At the same time central banks are permitted to hold gold as an asset, like real estate and buildings. That being so, they will all be keen to see the price of gold go up and not down. As the South 'African output of gold is declining and the commercial demand is slowly increasing and, what is more, as the investment or hoarding demand for gold as a store of value is also not likely to fall while governments go on printing paper money like confetti, there is no reason to expect the bottom to fall out of the gold market. Charles Stahl, who edits Green's Commodity Services, has said long ago in this journal that he expects the gold price to fluctuate between $120 and $180. He is probably not far short of the mark. He made this forecast when most other commentators were predicting a rise in the price of gold to over $200 an ounce.
The other resolutions of the IMF Jamaica meeting of finance ministers were more helpful. First, the floating exchange rate regime has been legalised but it was agreed that a return to fixed rates should be made at the earliest opportunity. Second, a 45 per cent increase in access rights to IMF borrowing facilities by member countries was agreed. M. Witteveen, the managing director of the Fund, thought that these increased credit facilities for the non-oil-producing countries might result in drawings of between $1,500 million and $2,000 million this year. This is all to the good seeing that the poorer half of the world has been embarrassed and not really helped by loans at high rates of interest granted to them by the rich. I should add that Mr Healey, having just drawn $1,170 million from the IMF oil facility, is not expected to join the queue of "developing" borrowers. What the poorer half of the world urgently needs are interest-free loans, that is, if they will have to wait longer than they thought for the free profit on the sale of IMF gold. ,
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