Mr Heath, the market and gold
Nicholas Davenport
Those of us who look at charts have noticed a curious movement in the FT 'thirty' index of industrial shares. It has been establishing a new base around 330 in spite of the continuing crisis which, at the beginning, knocked it down to 3051. This suggests that it could break upwards on either of two happenings. First event: Mr Heath ends the uncertainty by declaring for a February election which the Stock Exchange believes he will win. (If they did not believe that, there would be a number of brokers jumping from the twenty-third floor of the Stock Exchange tower.) Second possible event: Mr Heath accepts the TUC self-denying ordinance — that their members will not use a special settlement of the miners as an excuse for pushing their own wage claims beyond Phase 3 — and declares an end to the threeday week, reserving his right to call an election if any TUC member later breaks their undertaking (in which case Mr Heath would undoubtedly have a landslide in the polls). The first event would, in my view, cause a modest rise in the FT index; the second event would cause a jump of at least thirty points. Obviously, if Mr Heath is wise, he will choose the second course. Any poker player would tell him that that is how he should play his political cards.
Now it is always risky to come to a conclusion from the charts when the volume of dealing in the market is so small. Virtually all the big investment institutions have stopped dealing, seeing that their managers cannot tell which way the political cat will jump and what sort of a recession will overtake world trade or domestic trade. The current confusion of investment thought is well illustrated by the contradiction in the opinions of an ex-Governor of the Bank of England and the present Governor, Mr Gordon Richardson.
There was a City conference last week on world banking organised by the financial papers where these pundits were throwing their weight about. Mr Gordon Richardson said that even without an oil crisis Britain would be in the red on its balance of payments for many years to come and that we would all have to tighten our belts and reduce our standard of living. Ex-Governor Lord O'Brien, who is now President of the Bankers' Association, followed him by saying that he had the feeling that things would get better rather than worse. World trade in recent years had continued to expand without much interruption and the professional skills of the world banks would help to minimise the _ risk of countries relapsing into siege economics and competitive 'dirty' floating.
That, he said, was only a 'hunch,' but he may well be right. In the general state of confusion it is useful to observe how the ordinary market man is behaving. He is buying gold coins and gold shares. He is backing gold rather than paper promises. The trouble about buying gold shares is first the high investment dollar premium — now 22; per cent with the £ at the low level of $2.18; second, the South African producing companies are always changing the grade of ore as the metal price rises, so that the yield calculations on which you might have based your purchase will automatically be upset. The only company I know that cannot change its grade of ore is Western Deep which is so deep — about two miles down — that it would be impracticable to do anything but take out what the miners reach; third, the Americans have been buying South African gold shares so avidly that market prices are getting dear. Since November the FT gold share index has risen by nearly 80 per cent. If the Americans were to turn sellers the market would collapse. But this does not apply to the market in gold coins, for a Kruger-Rand gold coin is 99.9 per cent gold and is priced at $122 an ounce on the daily gold bullion fixing.
The price of gold itself looks set fair. It was interesting to read that at this banking conference M.
Rene Larre, the general manager of the Bank for International Settlements, said that there was very strong pressure to replace the present value of gold reserves by a new one based on the market price. "I should expect," he added, "that the confusion we have known for the last ten years regarding the role of gold is coming to an end. For one thing, the European countries may feel inclined to use their gold reserves at least in transactions with one another. If so, they will have to
STpehcetator January 26, 1974 agree upon a realistic valuation of the metal." That opinion will certainly be endorsed by the French, M. Larre was almost endorsing what two Oxford economists -Fred Hirsch and Peter oppenheimer — put forward in the Financial Times on January 15. The gold reserves of the industria! countries at the nominal 'official price of $421 an ounce would be only $36,000 million but at the then market price of $120 theY would be worth over $100,000 million. The two economists suggest that the industrial countries should release 25 per cent of the gold stockpile this year, which would take care of half the extra cost of oil, and another 25 per cent over the next four years. At the same time the IMF, which been "over-stuffed with gold, should release half its present hoard of $6,500 million at the normal price (the half would be equivalent to about $10,000 millin? at current market prices). TI.111 operation would give the Arab n'' exporting countries an asset fo,r which, they said, "they have a'"
ways shown a preference." „
There is unfortunately no stP of any agreement among the In" dustrial countries either as to Yio! the huge oil deficits are to financed or as to what role g°' will have to play in the operation. The Germans and the Americans, want a concerted approach so tha' the consumers may demand a reduction in the wildly escalating price of oil. The French and the British seem to be intent on doing private deals with the !val./III producers whereby the Arabs No,' accept bills to be discharged In the sale of arms, tankers, refineries and dry docks. In moneY matters allies, as well as thieves' will often fall out. Meanwhile sterling remains iat trouble, and the dollar alnlose daily improves. Neither Of Government nor the Bank °t England does anything to suPP°r„ the £. There is market talk of a"e immediate loan from the IMF. /1"100 could draw, in point of fact, $3P,„ million but that would not he're, very much seeing that we110,5 short-term liabilities to foreigne', of more than double that amoun',: I would have thought that the Bank would be keeping control over the 'leads and lag,' but this is a time of indecision the City reflecting Whitehall. Only gold has an air of decision.
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