In the City
The gold question mark
Nicholas Davenport
The next annual meeting of the IMF is in October, which is too late to stop the next IM F auction of gold, which is on 15 Septemtember. But I hope the European members will unite in a body to stop these ridiculous auctions which are depreciating the value of central bank assets and robbing the developing world of a promised bonus. For, although the Americans have succeeded in getting gold removed from the world's monetary system—in the vain hope that eventually we will all adopt the almighty dollar as the universal currency—the central banks still hold over 8100,000 million of the stuff at the present low price of SI 12 an ounce. What would be thought of commercial banks if they were to depreciate the value of their main asset, which is property and loans secured on property, by throwing on the market every building they possessed or had a lien on ?
At the ill-fated meeting of the IMF, in the autumn of 1975, it was agreed, after a great row between the French and the Americans, that the IMF should dispose of its gold holding of 150 million ounces by selling on the free market 25 million ounces, handing back to the original subscribers 25 million ounces and keeping 100 million ounces at Fort Knox for the time being. The threat of these public auctions caused a sharp drop in the free market price of gold in September 1975 from around s160 to near 8130. It was subsequently announced—as it were to publicise the fact that the American-dominated IMF was determined to smash the free market price of gold—that sixteen auctions were to take place of 780,000 ounces each time at intervals of about two months.
At the first,auction the demand for gold exceeded the 'amount offered and the 'cutoff' price was 8126. At the second auction on 14 July the demand again exceeded the amount offered and the 'cut-off' price was 8122.05. Since then there has been a lot of bearish talk and continuing sales of gold by Russia, which has no payments surplus to pay for its grain purchases, so that the market in gold bullion has been exceptionally weak. The lowest price touched at the daily 'fixing' at Rothschilds has been 8105 but as I write the price has recovered to SI13. My friend Charles Stahl, who writes the shrewd Green's Commodity Service bulletins, expressed the opinion after the second auction that the price would not go lower than 8105 an ounce. So far he has been right.
It was significant that the French National Bank was reported to have been buying gold at these auctions through the Bank of International Settlements—the IMF agreement stipulated that no central bank could make bids directly—but no banker (not even a Swiss banker) is likely to go on buying if the Russians have more gold to throw on the market. It is this prospect which makes it essential to postpone further auctions until this—and other uncertainties —have been cleared. The Americans may like to embarrass the Russians but it is pretty cynical of them to ignore the plight of the developing nations. It had been agreed at the IMF that the difference between the auction price and the official price of gold. which was $42, should go to a special trust fund to help the developing nations with their appalling balance of payments deficits. If the gold auctions are continued these debt-ridden countries are not likely to get much out of that small gesture to help meet annual deficits of up to 830,000 million.
As long as the IMF auctions threaten the future price of gold the bullion market must be regarded as unrealistic as it was when the price was zooming up to S200. The demand for gold—commercial or investment or speculation—could be met for many years from monetary reserves and hoards but there is no evidence that holders are prepared to let their stocks diminish, much less disappear. Who wants to dishoard gold when the world, is becoming more dangerous and its paper money more suspect ?
The troubles in South Africa are, of course, likely to make the market price of gold rise rather than fall. The Mining Journal reports that at the present low price fifteen mines in South Africa are uneconomic--in other words, about 17 per cent of South Africa's output. Most of the Canadian gold mines have also become uneconomic. If the rioting spread to the mines on the Rand there could be a serious hold-LIP of production. The present slump of over 50 per cent in the leading 'Kaffirs' is surelY discounting that possibility. For some years the output of the South African mines has been declining. It was 1000 metric tons in 1970; it had dropped to 708 metric tons in 1975. Soviet production is also believed to have fallen slightly in 1975 to about 407 metric tons.
As regards demand there has been a Pickup in fabrication demand. With lower gold prices and the start of world economic
recovery one would expect jewellery manufacture to improve. The experts of Consolidated Goldfields produce demand figures which are quite astonishing. Carat jewellery manufacture, they say, recovered sharply in 1975—from 231 tons to 532 tons —and is still improving. With the gold used in electronics and dentistry and other industrial purposes (medals and medallions) the total commercial demand, they say, will very soon take care of the reduced output from the mines. On top there is the speculative or hoarding demand. Governments cater for this natural instinct—some people like the look of gold quite apart from the Chance of making a profit out of it—by Minting gold coins. The most popular and the most accessible is the Krugerrand, a not very beautiful coin showing a springbok and containing exactly one ounce of gold. There was a huge demand for these coins in 1973-74 but in the first six months of this Year sales dropped to 1,585,400 coins, a decline of 44 per cent from the first half of 1975. The government no longer allows the import of these coins for domestic hoarding, so that they command a slight Premium over the international Krugerrand but the premium over the gold content is still only 4 per cent. The most beautiful gold coins are the Mexican eagle and the English sovereign with dear Victoria and her crown.
Although the experts believe that industrial use and jewellery manufacture in the developed world will account for 750 tons of gold this year and coins for about 150 tons there will still be a surplus balance of supply coming from Russia to be absorbed by demand in the developing countries and the Middle and Far East. This suggests that the IMF gold cannot be safely disposed of through the auctions without the participation of the central banks. They have so far participated and in my view will continue to participate. The fact that they have come to the rescue of Italy and Portugal by accepting gold as collateral for loans proves that they are willing to make good use of gold in spite of the fact that it has been officially demonetised. (The bankrupt countries have, one must admit, found it easier to use gold as collateral than to sell it.)
Because the French as well as the Swiss banks have been taking up some of the gold at the IMF auctions one may fairly conclude that there is still a potential European 'gold bloc' which is not prepared to demonetise gold completely as the Americans are. There is no reason why the world should not eventually have two Monetary systems—a paper dollar one and a semi-gold-backed European one. After the appalling inflation which the paper currency countries have suffered there is Obviously a desire to bring back gold as a standard of value and to make use of it as an asset in central bank reserves. All things Considered I would be surprised to see gold
all below 8100 an ounce and if the IMF t.ictions are suspended, as they should be, would expect it to rise sharply.
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