Red gold and black gold
Nicholas Davenport
Only central bankers could be stupid enough to cut off their noses to spite their gold faces. Of their total world reserves of $182,536 million ($175,095 million if You leave out the IFM position but include the $10,625 million of SDRs) they have $43,140 million locked up in gold which is completely immobilised. This is because the gold is officially valued at $42.22 per ounce and no one is prepared to use it at that Price for international settlements When the free market price of gold is just over four times higher. So 2$ per cent of the world's monetarY reserves are not being put to use although the demand for credit has driven interest rates up to preposterously high levels which Mr Harold Lever rightly described as "outrageous, dangerous and destructive." This absurd situation caused the nine finance ministers of the European Common Market to meet recently at the resort of Zeist to work out a more sensible arrangement which would allow their gold reserves to function. ,TheY happily and properly agreed at gold should in future change hands between central banks at rates linked to its price on the Yverld market. The French and the Italian central bankers thought that the present regulations 112.wing them to sell gold on the ee market but not to buy should ue changed, so that they may be allowed to buy, but this was not tenerally accepted. Our own hancellor, Mr Denis Healey, thought that he would like to see some official sales on the free ItTI .larket in order to test its elas.citY. That, Of course, would be latal for stability and disastrous for the gold policy which the West tin,Ust pursue to meet the confronqtion of the Middle East oil
flopolists. But Mr Healey did not seem to understand what the Zeist meeting was really about. He hoped that his part in it would not be misconstrued. There was no weakening, he said, in his Government's opposition to any revival of the role of gold in the world's monetary system. That, of course, was not the idea behind the meeting at all. The finance ministers of the EEC were simply bent on restoring the use of gold at the market price for settlements between central banks. If the Americans refuse to agree that would confine the proposal to settlements between the nine EEC members.
Mr Healey cannot, however, go back on the ministers' decision to dispatch Professor Willem Duisenberg, their Dutch colleague, to the US to win over the Americans to their sensible and limited gold proposal. Even this is not going to be so easy. The Americans are extremely touchy about the price of gold. They have been wanting to demonetise gold completely ever sence the days of Secretary Henry Fowler in the nineteen-sixties. They resisted changing the official price of gold for thirty-seven years, that is since 1934 when it was moved up from $20 to $35 an ounce by President Roosevelt. When the dollar was devalued under the Smithsonian agreement in December 1971 the official price was raised to $38 and in February 1973 on the ,second devaluation to $42.22. No doubt Dr Arthur Burns, the chairman of the Federal Reserve Board, will trot out the old cliché that any increase in the price of gold is a highly inflationary step. Seeing that the central banks have a strict control over the volume of credit allowed to the commercial banks — and in some cases over the direction of it — there is no validity in this hoary argument but Dr Burns is presently pursuing a dear money policy, having
allowed prime rates to rise to 101 per cent, because he believes — wrongly in my view — that the threat to the American economy lies in the current inflation, not in a coming recession. Any banker who believes that you can cure a cost-push inflation by dearer money should, of course, have his head examined.
Whether the new Secretary of the US Treasury, Mr William Simon, shares Dr Burns's views I do not know but it seems likely that he will be told not to accept Professor Duisenberg's proposals. In that event the EEC members must decide to use the free market price of gold for settlements between themselves. This could be considered as a first step towards the ultimate solution of the gold question, which is a writing-up of central bank gold reserves to the free market value.
If Professor Duisenberg runs into trouble over this question I advise him to call on Mr Harold Lever for help. It has been announced that Mr Lever is to visit Washington on May 2 and I imagine his mission is concerned with the finance of our balance of payments deficit. As it was he who prevented Secretary Fowler from demonetising gold in the nineteen-sixties, his influence on the new Treasury Secretary's thinking about gold could be profound. It is interesting to find. that Mr Lever has completely changed his views about gold since the collapse of the Bretton Woods system of international exchange. In an interview reported in the Sunday Times of July 15 last he remarked that "to phase out gold from the monetary system now needs not a holding down of the price but a vast increase in the price, say, to $300 an ounce." How right he was!
He went on to say that there was no chance of covering the huge new payments for oil imports by the normal exchange of goods and services; the West would have to offer new investments and gold, especially gold for which, he added, "the oil producing countries seem to have an unlimited appetite."
As it happens, the quadrupling of the price of oil has already been matched by the quadrupling of the monetary price of gold. If the gold reserves of the capitalist world were to be written up to the present free market price, say, $170 per ounce, it would add close on $130,000 million to central bank reserves. This would be extremely helpful, seeing that the extra cost of oil to the West this year will be of the order of $60,000 million. But it would not help Great Britain very much. The foolish mandarins of the Treasury or the Bank allowed our gold stocks to halve in the past five years: they are now a miserable $886 million. Writing them up to $3,500 million would not even cover the extra $4,800 million cost of oil this year.
The UK will therefore have to rely on its black gold — the oil from the North Sea. Our current demand for oil is nearly 21 million barrels a day, but it will be some five years before that amount starts flowing from the prolific fields in the North Sea. However, a future value of over $7,000 million a year is not an exaggerated yield to come from our black gold. In the meantime we and the West will have to rely on our red gold which should be written up to the free market value. In spite of the exaggerated alarm over South Africa and the Portuguese revolution the market price has dipped only slightly below $170 an ounce.
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