TRAFFIC IN GOLD WHY PRICE SPECULATORS REFUSE TO BE PUT OFF

Press, Volume CVI, Issue 31116, 20 July 1966, Page 12

TRAFFIC IN GOLD WHY PRICE SPECULATORS REFUSE TO BE PUT OFF

<Bu

"LOMBARD"

In the "Financial Times”. London!

(Reprinted t>B arrangement!

No matter how 'hard central bankers try to make it clear that the one change in the world’s monetary arrangements they would never agree to is an increase in the world price of gold, hoarders continue to absorb the great bulk of newly-mined gold flowing into the bullion markets. And this is not the onlv reason why it now seems certain that what may be called the golden aspect of the international liquidity problem will become further intensified in the months ahead—conceivably to the point of adding materially to the existing troubles of the reserve currencies.

International Monetary Fund statistics show that, having recorded no more than a trivial increase in 1965, world official stocks of gold pretty well stopped rising altogether in the early months of this year. And as there occurred during the period a substantial movement of official gold into the Fund itself in connection with the additional subscriptions required by the general revision of quotas, total stocks held in national reserves actually suffered a sharp contraction. Demand Insistent Gold traffic statistics for more recent months are not yet available. But there is no reason for thinking that the situation has changed significantly in this period. During much of the time the open market price for gold in terms of the dollar has been running in London within close distance of the central bankers’ gold pool ceiling of around $35.20. And the implication of this is that the private demand for the metal has been insistent—so insistent that it seems unlikely that the pool would have been able to accumulate any appreciable amount of metal for distribution between its members.

There is a good deal of evidence that the pronounced tendency for the private demand for gold to grow stronger year by year is explained to some extent by the relatively spectacular increase in recent years in the use of gold in industry and the fine arts. But there can be no doubt that’hoarding activity accounts in the main for the fact that the movement of gold into official stocks has all but halted. And while much of this is obviously connected with a mistrust of currencies in general, a continuing belief that the world price of gold is going to be increased sooner or later is undoubtedly also playing its part. The interesting question, of course, is why it is that hopes of the world official price of gold being raised are still running at such a high level. There has not been the slightest suggestion that the talks during the last year have resulted in the central banking community modifying its attitude to this issue. So far as can be gathered, the upshot of the latest discussions, as with the earlier ones, has been that, if any reform

of the international liquidity I system is going to be needed, it is a matter for the future rather than for the present and that, when the time does come for action, the additional reserves should be provided through credit creation alone. Change In Arguments Part of the explanation for the refusal of the gold price speculators to be put off by this lies in the feeling that the near-stop on the flow of gold into official reserves is itself bringing about an important change in the relative weight of the arguments for and against an increase in the world price. Up to a year or two ago it was supposed that the diversion of a large part of the flow of newly-mined gold stock into private hoards was a temporary phenomenon. It is now argued that, as this situation could continue indefinitely, the central bankers might be compelled to reconsider their attitude having regard to the serious implications of a continuing famine of gold at official level.

It can, of course, be said that, having managed to get by with relatively modest additions to the gold element in its reserves for so long—even before the beginning of last year official gold stocks were rising at a much slower pace than international reserves as a whole, the world may well be able to cope with a continuing gold famine. But, against this, the international monetary system has already been placed under considerable stress by the inadequacy of gold supplies in relation to the call for them so any intensification of these tensions might well, therefore, prove intolerable. However, current enthusiasm for speculating on the gold price rise does not stem from famine considerations alone. It is also connected with the belief that the tendency for

.the United States balance of | payments to weaken just when the central banking community has decided—quite wrongly in my view—that there is no need for a strengthening of the liquidity structure so long as the American deficit continues could lead on to a change in Washington’s attitude to the gold price issue. Outflow From U.S. The big outflow from United States gold reserves that occurred in the early months of last year—between January and June it was proceeding at an annual rate of well over $2OOO million—was halted, it is recalled, by the announcement of United States plans largely to eliminate the country’s payments deficit by the end of this year and by the prospect of other United States payments worries being greatly reduced by reform of the international liquidity structure. Is there not a serious prospect, it is asked, of the outflow being renewed now that the United States payments gap is expanding rather than contract ing and now that hopes of Washington obtaining relief from new international liquidity arrangements are virtually nil. The American authorities would not necessarily be induced to withdraw their opposition to a change in the world price of gold, of course, by a renewal of the gold drain. The free stock available to them after allowing for note cover requirements and other commitments is still in the region of $2500 million. And the note cover requirement could itself presumably be modified, if the need arose, to accommodate bigger losses than that. But there is a widespread belief that Washington might seek relief in a revaluation of its remaining gold stock if a serious prospect arose of the present free reserve being exhausted. And nothing, it seems, is going to dispel it.