The gold future

Nicholas Davenport

As it is now certain that Japan. and Europe will be running into a recession in 1974 — they have themselves to blame as well as the Arabs — we should watch the price of gold. When currencies become weak gold usually becomes strong. On the free 'market gold has been as high as $130 per ounce this year but it fell sharply below $90 for a time when the central bankers last month decided to put an end" to the two-tier system which they had set up in the gold crisis in the winter 1967/68. Seven countries were parties to this agreement, but not France, and M. Giscard D'Estaing has reproved them for acting so precipitately when no agreement has yet been reached on the future role of gold in the world monetary system.

The Americans regard the decision to abandon two-tier as a, further step towards the demonetisation of gold. They apparently take the view that as central banks are now free to sell gold from their reserves on the free market — but are not free to buy unless it falls to the present official price of $42 per ounce — there will be a"further sharp fall in the price. But this view appears to be erroneous for the following reasons.

First, central banks are not likely to want to get rid of their depleted gold from their reserves during a raging world-wide inflation. If 'they were to do so they would have to acquire paper currencies which are nearly all under suspicion with the exception of the dollar. Since the American balance of payments has been restored to surplus the dollar may now rank as a potentially strong and under-valued currency. It should be noted that gold now represents only 15 per cent of the industrial world's total reserves of £121,000 million. In the view of the Europeans this is too low a percentage. Second, the EEC countries under the lead of France may seek to raise the official price of gold before they approach European monetary union. They are finding it difficult to arrange settlements within the Nine with an unreal official price of gold and have agreed that in the operation of 'the snake' subsequent adjustments will be made when the official price of gold is raised.

A further point here is that over the coming weeks France must repay Germany the support given to the French franc earlier this summer. It may well be agreed that the repayments should be made in gold at the free market price.

Thirdly, the major oil-producing Arab states, namely, Saudi Arabia, Kuwait, the Union of Arab Emirates, and Qatar, are believed to have accumulated reserves of • over $10,000 million and it is likely that they will want to put more of their cash into gold rather than increase their currency deposits, either in the suspect currencies of the friendly Euro-dollar marliet or in the dollar currency of the enemy, the United States.

The Nairobi meeting of the IMF revealed that the world was not ready to agree upon a new inter national monetary system, or even discuss the future of gold, but behind the scenes France made it clear that while she was ready to admit that gold could no longer play the dominant role in any fu ture system it was essential to fix a value for the SDR, the new numeraire, based not only on a key bundle of currencies but on an infusion of gold written up to near its free market value.

At a conference on "The Continuing International Monetary Crisis" organised last week by the Times and Associated Business Programmes Mr John Nott, Minister of State at the Treasury, Said that after a year's work the Jeremy Morse Committee of Twenty had defined the "general shape" of a reformed monetary system but he did not go into the detail of the shape of the new .numeraire. It was agreed, he added, that the process of adjustment should bear equally on deficit and surplus countries but he admitted it was all like a jigsaw puzzle, "Some sections of' the puzzle have been more or less completed. In others we have only sorted out the pieces into groups ". How one interprets this bizarre statement is anybody's guess.

Mr Nott's optimism has become proverbial. At a recent lunch given by the Anglo-Dutch Trade Council he claimed that ministers had been unfairly criticised for their "ebullient optimism ". Seeing that .British exports had been growing faster than the increased.volume of world trade for the first time since the war and that government spending may be rather below and tax revenue rather above expectations in the current financial

year he claimed that optimism was justified. But why did he ignore the fearsome outlook for the floating £ which has only been propped up by offering dangerously high rates of interest (Bank rate at 13 per cent!) and borrowing abroad for the public

authorities at a dangerously high volume (the volume borrowed since March being a third of our total reserves)? This is the critical situation which forbids "ebullient optimism ". Since the Smithsonian agreement of December, 1971, the £ has fallen 20 oer cent against all other 'currencies. If the £ were to slip further while wages , and prices were still escalating our

inflation would get out of control and go the way of Brazil.

At the same money conference Professor Galbraith said that floating currencies were no solution to the recurring international monetary crises. In a closely knit world there must be some " stability and predictability in exchange rates." That could only be achieved in one way — "by much greater co-ordination among national economic policies." That is a truism which has often been repeated in this column. As we all know, the Bretton Woods system broke down because the members of the IMF pursued different and conflicting economic policies„ some going all out for huge export

surpluses and some allowing huge payments deficits to pile up. Now we have an added and more dangerous disequilibrium force — ,the cutting down ot cal supplies by the Arab producers which is bound to cause a world trade

recession and force many surplus countries to run into deficit through an energy shortage. Let us hope that this tragic disorganisation of world trade will induce countries to do what Professor Galbraith is urging — co-ordinate their national economic policies. • The upset to currency stability which the Arabs are forcing on the industrial world should make — short-term — for a rise in the price of gold on the free market. Longterm, of course, the growing commercial demand for gold, coupled with the increase in Middle East hoarding as more currencies come under suspicion, will gradually force up the price as the supply of new gold from the mines declines.

As I write the price has recovered to $90 an ounce but if France succeeds in getting her partners in the EEC to agree to a monetary union it will have to be on the basis of a much higher price for gold. 'For how else could the central banks control the situation? How else could the Bank of France induce domestic hoarders to part with their gold except at some fancy figure like $200 an ounce? If gold is to be part of the EEC currency system the hoarders must first be made to .disgorge!

But how sad it is to see British industrial shares plunging to new low levels—they are down 30 per cent from their top— and gold shares being bought just because of this energy crisis! In the last account £6,000 million was knocked off the market value of our industrial shares.