|

By TOM DRINKWATER

HE recent huge purchase of
gold in the London Gold
‘Market and . elsewhere
Were the direct outcome of the
devaluation of the pound ster-
ling.
.. With the pound knocked off
its’ perch, confidence had been
thereby undermined in the
American dollar, and in the sta-
bility of the whole international
Monetary set-up in the capital-
ist half of the world.

Gold no longer fulfils the day-

to-day functions of money, in
form of gold coins, but it
retains nevertheless a major
€conomic role.

A considerable amount is used

dustrially to make jewellery,
teeth, etc. But more of it is

ught for monetary purposes,

Cither by central banks (Bank

of England, Bank of France etc.)

to put into their reserves, or by

Private individuals and firms to
Put into hoards.
e

Among the capitalist coun-
tries, South Africa is far and
away the largest producer of
80ld. The Bank of England acts
48 its selling agent, which means
Mm turn that London is the
World’s most important gold
Market. The other markets, in
Paris, Zurich and so on are sub-
Sidiary.

The Soviet Union is also a
Major gold producer’ and. sells
80ld particularly when it has
heed for pounds, dollars etc. to
Pay for required imports.

The central banks want gold
Mainly for international pur-

Poses, because it is still the

final method of settling a debt
tween one country and an-

Other, Furthermore, in some

Countries, the central bank is

Still required by law to hold a

Roan amount of gold as back-
ng for the money circulating in
€ country.

The private hoarders have two
Main reasons for buying gold.
th € first is traditional—the idea
rom gold is more likely to hold

S value in this wicked world
f &n national currencies such as
Tancs, dollars, rupees, etc.,
Which are very apt to lose their
pelhe through inflations and de-

aluations,
e
Rene second, and now much
more explosive, reason for pri-
ate buying is the widespread
aa that the official world
ee of gold is bound to be in-
~°ased sooner or later from the
Present level of $35 Americar
are ounce to a much higher fig-
©, possibly $70 per ounce.
fix € American Government
ei its official price of $35
unce of gold long ago in
ne 1930s. To maintain this price
eee be prepared to buy and
den 80ld at this figure in its
= Ings with other govern-
€nts and central banks.
O far it has not refused to
a Outright, but it has put
5 pare on other governments
that old on to American dollars
and come into their possession,
all. NOt to insist on turning them
i. ae gold, at $35 an ounce,
© expense of the American

Sold reserve,

Th e
_ *his official American price

wobnu iMareid saw Yads

’ has also been written into the

rules of the International Mone-
tary Fund, which among other
functions, regulates the ex-
change rates of the capitalist
half of the world. The I.M-F. de-
fines the dollar as being equiva-

lent to so much gold—in fact to

one-thirty-fifth part of an ounce
of gold.

Thus when British currency
was fixed with the LMF. at £1
to $2.80, this meant also that,
officially, one ounce of gold was
worth £12 10s.

Since the devaluation of the
pound to £1—$2.40 an ounce of
gold is now worth officially £14
lls. 8.

The official price is one thing,
however, while the market price

_is another. There is a widespread

belief that the day will come
when the official price of gold
must be increased, simply to
take account of economic reali-
ties.

After all, the price of every-
thing else has gone up three or
four times since the 1930s, so
why not gold?

The South African Govern-
ment, of course, argues for a
higher price, since it would make
goldmining more profitable.

Some experts also argue that a
higher gold price would help
world trade, by increasing the
value of the reserves held by
central banks, and increasing
the output of gold.

There is, therefore, an under-
lying pressure which tends to
push the London market price
above the official figure of $35.

Private buyers are often pre-
pared to pay more, as are some
central banks which wish to
avoid displeasing the American
government by asking it to sell
gold. ;

e

The devaluation of the pound
sterling has added fuel to the
flames, first in a general way by
undermining confidence in all

. currencies. If once major cur-

rency can be devalued after so
many Official. denials, why not
others? More gold has therefore
been bought as a safety precau-
tion.

More particularly, the devalu-
ation of the pound has focused
attention on the weak position
of the dollar, -which has been
looking sickly for many years as
a result of the American balance-
of-payments deficit. This deficit
results from the export of capi-
tal from the U.S., and, still more
important recently, the mount-
ing cost of the war against Viet-
nam.

The American payments de-
ficit drains off gold from the
American official reserve. This
reserve waS enormous after
World War II, and is still large.
But it has dwindled steadily and
at times very rapidly.

The question then arises as to
whether the American govern-
ment can afford to go on losing
gold in this way.

Private speculators calculate
that it is worth buying gold be-
cause sooner or later in their
view the American government
will be forced to agree to an in-
crease in the price of gold—
which would, after all, raise the
dollar value of the remaining
U.S. pile of gold.

The private plus official de-
mand for gold has the effect of
pushing the market price above
the official level of $35. The
higher the price goes, the larger
the demand, because the widen-
ing gap between the official price
and the market price convinces
the speculators that they are on
to a good thing, and that the
official price must eventually be
raised.

In order to hold down the
market price the American gov-
ernment has persuaded other
major capitalist countries to
form a Gold Pool.

@

This pool is used by the Bank
of England, which sells gold in
the market day by day in as
large quantities as are needed to
meet the demand and stop the
price from going above $35.20.

The pool countries are the
U.S., U.K., West Germany, Bel-
gium, Italy, Netherlands and
Switzerland. France was a mem-
ber, but is now providing no
more gold.

Selling from the pool has peg-
ged the price just below $35.20,
but becomes very expensive
when the private demand for
gold is as large as it has been
since the sterling devaluation.

The pool members see gold
being drained out of their ex-
isting reserves into private
hoards. This worries them con-
siderably. iam

They get dollars in exchange,
but it is gold and not dollars
that they prefer to hold in their
reserves. Their respect for gold
is just as strong as that of the
private hoarders!

Moreover, the _ speculators
keep a watchful eye on the gold
reserves of the U.S. and other
pool members. When these re-

serves fall, the speculators are:

further confirmed in their opin-
ion that the situation will fin-
ally reach a point of crisis. at
which the only outcome will be
an increase in the official gold
price.

The American government is
thus on the horns of a dilemma.
If gold is not released from of-
ficial reserves, then the market
price will shoot up.

©

Confidence in the dollar would
be more and more difficult to
maintain, because officially it
would be worth one thirty-fifth
of an ounce of gold, while in
the free commercial market the
dollar. would be valued at a far

|

GOL

ifSie [g1iv ic

smaller amount of gold.

Further, it would pay central
banks to buy gold from the U.S.
and sell it in the market.

On the other hand, if gold is
persistently fed out from official
reserves to keep the market
price down, this will create
mounting tensions in the whole
international monetary system.

None of the governments and
central banks is willing to do
without gold reserves.

In fact, if they had a free
choice, most central banks
would keep 90 percent or more
of their reserves in gold and
only a small balance in the cur-
rencies. of other -countries, i.e.,
dollars, pounds, etc.

This is not difficult to under-
stand when one notes that every
overseas country, which was
holding pounds at the time of
the recent devaluation, autom-
atically lost 14.3 percent of the
value of its money as calculat-
ed in terms of gold, dollars,
francs or etc.!

6

To escape from this dilemma
the American government has
reportedly been trying out vari-
ous new suggestions on the
other gold pool members, ap-
parently with little success.

The U.S. would like other
countries to restrict the rights
of their citizens to buy and hold
gold, as is indeed legally the
case already for American and
British nationals.

But the only response here
has been some minor changes,
limiting the more extreme tech-
niques of gold speculation, such
as buying and selling for deli-
very some time in the future.

Another American idea, ac-
cording to reports, is to allow
there to be two markets and
two prices for gold, a higher
price in the private speculative

market, and a lower price in the

Official market.

Methods would ‘soon be
evolved of buying in the cheap-
er market in order to sell at a
profit in the dearer market.

A third American idea is that
other central banks should sur-
render part of their gold reserve
to the U.S., receiving in ex-
change Gold Certificates.

6

The same gold could then be
counted twice, once in the
American reserve, and secondly
in the reserve of the country
holding the Gold Certificates,
these certificates representing
the right of the country to claim
gold from the U.S.

This notion again appears to
be a non-starter.

The emphasis has now, in-
deed, swung right round. The
other countries are suggesting
that the real answer is that the
Americans should restore inter-
national confidence in their own
currency, the dollar, by taking
steps to close the gap in their
balance of payments.

& eors--

QQ.

‘| AGIANUARY'26, 1968-/ PREIFIC TRIBUNE page S248!

“At

Pikes }: aoe =}

> PR

emcee

SS RT SRN TR SD BE MTS TST A DE RR PRO oe