In the City
Gold and the dollar
Nicholas Davenport
It was said of my old friend Dick Crossman that his diaries revealed the extraordinary naïveté of an academic confronted with sophisticated ministerial life. President Carter is no academic but his naïveté in dealing with complications of monetary life is quite amazing. He has given orders to sell gold from his diminishing stock-pile to help support the ailing dollar. Whenever America has begun to sell a commodity from its stock-piles it has always depressed the price for a time and then made certain of a recovery when the selling stops. It will be the same with gold.
What makes this gold manoeuvre ridiculous is the tiny size of the operation. He is selling only 300,000 ounces monthly — beginning on 23 May — for twelve months while the IMF is selling 540,000 ounces at its monthly auctions. 'These sales of gold', says the American Treasury, 'will have the effect of reducing the trade deficit either by increasing exports of gold or by reducing the imports of this commodity'. Last month the US had a trade deficit of $4i billion! Even if this falls to an average deficit of $2i billion, as the Treasury hopes, the sales of gold will only produce about $50 million a month if the price stays the same, which it will not do. Last year the US imported nearly ten million ounces of gold (including gold coins), so that its present sale operation will not offset them by even half. It is a peanuts affair.
If President Carter really wanted to ease the dollar crisis, which is caused by the ever-growing supply of unwanted dollars in the hands of foreign creditors, he would surely propose that some of these excess dollars be funded and the best way to fund unwanted dollars is to issue five or ten year dollar bonds convertible into gold. These could be issued with a very low coupon because they would be immensely popular. I see that Charles Stahl, who writes Green's Commodity Bulletins, suggested this idea in his 22 March issue. At the end of 1977 the US stock of gold was 2771 million ounce s. This would support a funding gold bond issue of over $50 billion and enable a sizeable reduction to be made in the overhang of surplus dollars. If the President really holds the common American view that gold is a commodity with no future he might issue more gold convertible bonds than his current gold hoard would allow and gamble on being able to buy gold t6 meet conversions at a lower price. But he would have to be quick.
The recent history of the gold price has been remarkable. After the first dizzy rise when it was loosed from its monetary chain of $42 it dropped to $103 an ounce in August 1976. Then followed a strong recovery and later a reaction to below $140 in June 1977. Thereupon a great bull movement took hold and, with increasing fear of a communist takeover in France, the price reached $190 on 8 March this year on Continental buying. On 5 April at the IMF auction 524,800 ounces of gold were sold at an average price of $178 an ounce. When it was realised that half the bids received at this auction were below $170 and that this was the first time since July 1977 when lower average prices were accepted than at the previous auction, it became clear that the bull movement in gold had for the time being shot its bolt. It had had a good run for nine months.
But gold will rise again, for the supply of new gold is declining and the commercial demand is increasing. Private investment — or hoarding — from time to time tips the balance towards a shortage of supply. Last year, for example, jewellery and industrial demand absorbed more than 1,000 tons of new gold from the mines of South Africa and Russia. 'Investment', it is estimated, took 200 tons in addition.
I cannot follow William Rees-Mogg — see The Times of 21 April — in his passionate
plea for a return to gold as an international reserve currency. The world through the IMF has now disowned gold for monetary purposes and if the world becomes dissatisfied with the dollar, as well it might, it will fudge up a new international unit of account like the SDRs of the IMF.
The OPEC countries in June are to consider pricing their oil in SDRs instead of dollars, as the dollar equivalent of the SDI?. is now around $1.24. Pricing oil in ,SDRs will avoid the OPEC countries losing money when the dollar falls in the exchange markets. This would certainly be better for the world economy than raising the dollar price of oil.
What is worrying William Rees-Mogg as well as the OPEC countries is that the dollar is no longer a reliable store of value. The truth is that in a period of world inflation there is no reliable store of value unless one picks out an old master — and there are not enough of these to go round seeing that they are frequently being stolen or bought up bY the Railway Board pension fund. But I would agree with the editor of The Times that gold is preferable to the dollar as make-shift store of value. As he says in his article, an increase in the supply of gold depends not on the paper-printing industry, but on the gold-mining industry, which happens to be declining in South Africa. As a rare commodity of lasting value to its users gold is likely not only to retain but to increase its monetary value. It is a pity that the editor over-dramatised his case. 'If Washington', he says, 'challenges gold to a knock-out fight there is only one possible victor'. Washington is hot challenging gold to a monetary fight because gold is no longer money but a commodity. The dollar is the currencY which is used and will continue to be used for the greater part of the world's trade. It is also the currency chosen for the greater part of the capital markets. Dollar Wall Street is also the largest investment mart in the world. Look what happened last week. The greatest share-buying spree ever seen sad' denly broke out. Between fifty and sigtY million shares were traded in each day. Irt six days the Dow Jones index of share prices rose by nearly 40 points. The bear market which had been pushing the index down from over 1000 to below 760, was suddenlY reversed. The index is now over 820. But it was not so much a bull movement as what is known as a 'buffalo' ,market, that is, 0 stampede. Being a stampede it has greater risks for the investor. But equity shares ert Wall Street are selling at hstorically lo price-earnings ratios and will resume the recovery when it is finally established that President Carter knows his monetary hes' mess. But this gold sale escapade suggest!, that he does not. Unless he agrees to AO; $40 billion in gold convertible bonds : cannot see how the dollar can be stabilisee' A pity that Chancellor Schmidt and Premier Callaghan did not consider this stabilisatatt technique at their conference this wee' instead of 'muddling through'.
Previous page
