The Future of Gold

DURING the second quarter of 1937, economic recovery which assumed a world-wide character after the devaluation of the Gold Bloc currencies suffered a reverse. Although the economic factors responsible for recovery continued to operate, their influence became paralysed by the gold scare, which for about three months hung over world economy like a nightmare. It began early in April, when heavy gold imports from Soviet Russia, and, rumours about the alleged intention of the Washington Administration to lower the official American buying price of gold, led to wholesale dishoarding. Arbitrageurs were afraid to ship gold to the United States except at a substantial profit to compensate them for the risk they thought they were running in under- taking the operations. As a result, the London market price of gold went to. a heavy discount compared with the price at which it becomes profitable to ship gold to New York. Throughout April, May and June the discount persisted in spite of substantial purchases of gold by the Exchange Equalisation Account.

The market in gold-mining shares was naturally the first to be affected by the gold scare. Kaffirs experienced a heavy slump. The loss thus caused compelled investors, specu- lators and Stock Exchange firms in London and other markets to liquidate other securities, and the weak trend thus spread over every section of the Stock Exchanges. The fear of the deflationary effect of a cut in the price of gold accentu- ated the all-round decline and affected also the commodity markets. Had it continued- for a longer period its effect upon spending, trade and employment would inevitably have been substantial. As it was, it checked the expansion of consumption and production.

It was generally believed that the gold scare had come to stay and that trade and the financial markets would per- petually remain under the cloud of fears of a depreciation of gold. The discount on gold against the American shipping parity had come to be regarded as a 'chronic state of affairs.

UNEXPECTED IMPROVEMENT.

Much to everybody's surprise, however, the discount gave way to a premium during the early days of July. The gold scare disappeared as suddenly as it had arrived. The change of sentiment in the gold market was largely due to the fact .that the majority of gold hoards in Western Europe had been liquidated during the second quarter of this year. The amount of gold deposits held by most London banks on account of their clients had been reduced to something like zo to 3o per cent. of the amount held before the devaluation of the franc.

Moreover, the increase of the sterling resources of the Exchange Equalisation Account by kzoo million was inter- preted as indicating the determination of the British Govern- ment to continue absorbing gold. In addition, the repatria- tion of French capital from the United States that followed the depreciation of the franc at the end of June mitigated to some extent the non-stop influx of gold to the United States. By the middle of July there was evidence of bear covering in the gold market.

The favourable change in the gold situation surpassed even the most optimistic anticipations. The question is, will it be of a lasting nature ? Once the covering of bear positions is completed, will gold go again to a discount and will this once more give rise to fears about the future ? The answer depends upon whether the gold scare was essentially a surface development or whether it was due to fundamental ca-oses which are like to remain in force.

Is there a superabundance of gold, and if so will it have to be remedied through a reduction in its price ? The reply of many economists to this question is in the affirmative. The value of their judgement, however, is qualified by tl- e fact that it is only since the acute gold scare began that they have arrived at that conclusion. Although all the statistical facts required for judging the gold situation were at their disposal long before the beginning of the gold scare, it was not until their attention was drawn to the gold situation by panic- stricken speculators and arbitrageurs that they discovered the existence of a superabundance. Yet it is important that the problem should be considered calmly and independently of the panicky atmosphere created by the gold scare. Several economists of reputation -in- this country and-abroad-became flustered, however, by the gold scare, and did their utmost to fluster the British and United States Governments into precipitate action. It was suggested in highly-authoritative quarters that in face of the superabundance of gold those Governments should resort to a reduction in the price of the metal.

GOVERNMENT'S ATTITUDE.

In resisting these suggestions, which were backed up by a large section of public opinion in both countries, President Roosevelt, Mr. Morgenthau, Mr. Chamberlain and Sir John Simon gave evidence of a high degree of financial stateman- ship. Although the tactics pursued by the two Governments during the gold scare are open to criticism, their policy in ignoring the proposals urging them to cut the price of gold deserves recognition. The two Governments kept their heads amidst the gold panic. They refused to be flustered into action which they would have regretted ever after. Being aware of their grave responsibility, they preferred to adopt the course advocated by Mr. Keynes, namely, to await developments.

It is now safe to take it for granted that the price of gold will not be cut until the experience of the next year or two at least has proved that fears regarding superabundance were justified. It is true that in postponing their decision the two Governments run the risk of increasing their potential losses on their increasing gold supplies, but, owing to the immense importance of the issue at stake, that risk is well worth taking.

Assuming that the price of gold is left unchanged for the next year or two and that the international rearmament race continues during that period, it is safe to take it for granted that there will be a material rise in commodity prices. As a result, the world's monetary requirements of gold will increase in proportion. At the same time the rising cost of production will tend to reduce the current gold output. Thus the upward trend of commodity prices is likely to go a long way towards providing a natural solution of the gold problem.

OUTLOOK NOT UNPROMISING.

An important question is, will the countries with in- adequate gold stocks be able to afford to increase their supplies ? This depends upon their trade balance and the international trend of capital. In order that a country should be able to acquire and retain gold, it must have an export surplus or an influx of capital. • Will the countries with depleted gold reserves be able to improve their trade balance within the next few years ? Will they be able to attract foreign capital ? The outlook in both respects is by no means unpromising.

During the last twelve months the adverse trade balance of the countries with large gold stocks—the United States, Great Britain, France, Holland, Switzerland and Belgium— has increased considerably- On the other hand, the foreign trade position of countries with small gold stocks—Germany and several Latin-American countries in particular—has improved. It is not unreasonable to suppose that this tendency may continue. Regarding the trend of international capital movements it is difficult to prophesy, but should President Roosevelt take action aimed at discouraging the influx of " hot money," through the exchange of information about foreign assets in the United States, the chances are that the flow of funds and gold to the United States will at least • be checked, if not reversed. There are also indications of a resumption of lending abroad on a moderate scale. This, together with direct arrangements between Governments on the pattern-of the agreements between the United States and China, and the United States and Brazil, should lead to a better distribution of gold.

We may therefore hope, without undue optimism, that the gold problem will solve itself in the course of a few years through .an increase of requirements, a contraction of the current output and a better distribution of supplies. Such an adjustment of the gold situation will take time, and it is conceivable that meanwhile we shall witness a recurrence of the gold scare. There is no need, however, to anticipate a recurrence of the panicky atmosphere experienced on various occasions during the second quarter of 1937.

PAUL EINZIG,