THE WORLD GOLD MARKET: A SEMIANNUAL REVIEW INTENATIONAL FINANCE SERIES NO. 22

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• Collection: General CIA Records
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• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 14
• Document Creation Date: December 22, 2016
• Document Release Date: October 27, 2011
• Sequence Number: 106
• Publication Date: August 1, 1970
• Content Type: IM

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DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
The W'e rld Gold Market: A Semiannual Review
International Finance Series No. 22
ER IM 70-,106
1'.` tgust 1970
Copy No. 7 6
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WARNING
This document contains information affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 794, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt k,, an unauthorized person is prohibited by law.
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
August 1970
INTELLIGENCE MEMORANDUM
The World Gold Market:
A Semiannual Review
Introduction
This memorandum, one of a series begun shortly
after the two-tier gold market was established in
March 1966, reviews developments in both the offi-
cial and private tiers of the world gold market
from January through June 1970.
Highlights
1. The calm pervading international gold and
financial markets since realignment of French and
German parities in the second half of 1969 continued
almost without interruption through June 1970.
Free market gold prices fluctuated around $35 per
ounce through mid-March then steadily climbed to
more than E~36 by early May in apparant reaction to
renewed Wall Street jitters and US action in Cam-
bodia. By' late June, however, free market prices
had declined to around $35.50 per ounce,.
2. Official gold markets have also been
relatively quiet. In the first six months of 1970,
the United States experienced a net inflow of $32
million in official gold. During the same period
several countries engaged in gold transactions with
the International Monetary Fund (IMF), but only a
few were in excess of $20 million.
3. The Soviet Union, after a five-year hiatus,
is rumored to be considering selling gold later
this year. Comments to this effect by a Soviet
Note: This memorandum was produced solely by CIA.
It was prepared by the Office of Economic Research.
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trade official have been played up in the Western
financial press. Thus far, although the USSR is
running a substantial deficit in its current account
transactions with hard currency countries and some
of its borrowing is at high interest rates, there
is no information to confirm the rumor. However,
Soviet sales if they do occur are not likely to be
very large.
4. An increase in free market demand for gold
could develop during the next six months or so be-
cause of growing concern about the, United States
balance of payments and the Middle East situation.
With interest rates still very high, however, and
with South Africa selling nearly all its newly mined
gold on the free market to finance balance-of-pay-
ments deficits, it seems likely that gold prices
will remain within the range of $35 to $38 per troy
ounce.
5. Demand from industrial users and traditional
hoarders probably about equals the supply of newly
mined gold. A gap will develop in future years as
demand from these sources grows at some 5% annually
while production declines about 1% a year. Ti
situation, however, may not soon produce substi.antial
price increases. The shortfall in supply would be
very small compared with the vast gold hoards in
existence, and, barring major crises, substantial
amounts of gold will probably be released from
hoards in response to moderate price increases.
The Official Market for Gold
6. At the beginning of 1970 the status of gold
as a monetary asset reached a historical point.
On 1 January the IMF allocated $3.4 billion in
Special Drawing Rights (SDRs) to member nations,
and, for the first time since the Fund began opera-
tions in March 1947, gold -- including that held
by members and international institutions --- ac-
counted for less than half of total monetary reserves.
7. The availability of SDRs in k,he settlement
of international payments transactions plus the
relative calm pervading the international r;urroncy
markets following last October's revaluation of the
Deutschemark led to some reduction in official gold
movements during the first half of 1970. Should
these trends continue through the remainder of the
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year, official gold transactions in 1970 will be
at the lowest annual level since the IMF began
compiling data in 1938.
8. On balance the United States gained $32
million in official gold holdings between January
and the end of June 1970. Of the 35 countries in-
volved in gold transactions with the United States,
only five bought or sold more than $2 million worth.
Kuwait was the largest seller with nearly $25 mil-
lion, while Malta and Ireland added another, $2.5
million and $2.2 million, respectively. The United
States acquired $23.7 million more through a pur-
chase from the IMF. The major buyers of US gold
were Uruguay ($8.1 million) and Argentina ($5.0
million). Significant non-US gold transactions,
many of which involved the IMF as a participant,
included, purchases by Japan ($59 million), Italy
($24 million), Switzerland ($28 million), the
Netherlands ($10 million), and Canada ($8 million);
and sales by Iraq ($42 million) and Greece ($10.
million).
The Free Market for Gold
9, After declining from a high of more than
$42 per ounce in July' 1969 to just above $35 per
ounce in December, London free market prices re-
mained at or below $35 per ounce for much of the
first quarter of 1970; a low of $34.75 was reached
in mid-January (see the chart). In mid-March,
prices began a steady climb. A spate of bad news
from Wall Street, reaction to United States activity
in Cambodia, and the usual pre-monsoon season in-
crease in demand from the Indian subcontinent
pushed prices to a $36.24 peak in early May. Sub-
sequently, prices drifted lower, ending the second
quarter near $35.50.
10. The rather lengthy period of depressed
free market prices following the December 1969 Agree-
ment* gave rise to rumors that Swiss bullion dealers
* This agreement enumerates several conditions under
which South Africa may sell gold to monetary author-
ities, mainly the IMF. One of these clauses allows
South Africa to sell to the IMF one-fifth of one
week's production for every day that both London
fixings are at below [footnote continued on p. 4]
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LONDON FREE MARKET PRICES
Weekly Range of Morning and Afternoon Fixings January -June 1970
were manipulating the free market to enable South
Africa'-to sell large quantities of its newly mined
gold to the IMF. While these rumors cannot be con-
firmed, it is well known that in mid-1969 the major
Zurich banks (the'Union Bank of Switzerland in par-
ticular) purchased large quantities of gold from
South Africa at substantial premiums.
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11. Manipulation of the free market price is
suggested by the extremely narrow price range that
prevailed for seven consecutive weeks -- from late
January through mid-March. During this period,
more than 85% of all morning and afternoon fixings
fell within the $34.97 to $35.01 range, with nearly
40% of all quotations set at exactly $35.00. More-
over, Swiss bullion dealers are in an excellent
position to influence the London free market fixing.
At each of some 255 morning fixings a year, the
manager of Rothschild's bullion and foreign exchange
department suggests an opening price based on a
previous half hour of intensive telephone conversa-
''ttons with people at the Bank of England and a host
of others, mainly dealers in Switzerland. Repre-
sentatives of the four other houses are in constant
telephone contact with their trading rooms and
these in turn are in direct communication with as
many as a dozen key clients scattered across Europe.
The result is that supply and demand conditions in
Zurich are strongly refle,::t,ed at the London fixings.
South African Gold Sales
12. During the first six months of 1970, South
Africa sold $343 million in gold to monetary author-
ities and another $387 million on the free market.
More than one-third ($130 million) of the official
sales represented sales to the IMF under the criteria
of the December Agreement when the price of gold was
below $35 per ounce. The IMF also purchased $177
million of South African gold under two other provi-
sions of the December Agreement and arranged for the
Swiss National Bank to obtain $10.5 million of South
African, gold. Switzerland, although not a member of
the IMF, benefits from the December Agreement because
its central bank may purchase up to 4% of the gold
South Africa sells to the IMF. Of the remaining
official sales, $22 million was transferred to France
as a result of a French IMF rand drawing.
13. News reports to the contrary, all South
African free market sales in the first half of 1970
were apparently made to the Union Bank of Switzerland.
Although South Africa continued to ship much of its
gold from Johannesburg to Zurich via Balair, a sub-
sidiary of Swissair, a substantial portion apparently
was supplied from South African holdings in London.
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For the purposes of this memorandum, South
African deficits are calculated before gold sales.
Under a special clause in the December Agreement,
however, South African payments deficits exist only
after the value of newly mined gold is counted as an
export item.
** ?South African payments deficits in the second
half of a calendar year frequently exceed those of
the first half owing tea, seasonal Zow in foreign
earnings during the fourth quarter. Present eati
mates indicate that 1970 will not prove an excep-
tion.
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outlook for gold prices. This summer a number of
The Outlook: July 1970 Through June 1971
14. South Africa's balance-of-payments deficit
before gold sales in 1970 will be about $1.45 bil-
lion.* Receipts from gold sales through the first
six months of 1970 totaled $730 million, of which
$387 million was obtained from free market transac-
tions. Although this provides a slight surplus for
the first six months, South Africa will have to sell
another $710 million to $720 million (see Table 1) in
order to cover payments needs for the remainder of the
par.** There appears to be little likelihood of a
substantial improvement in South Africa's payments
position during 1971. Another annual deficit before
gold sales of perhaps $1.3 billion to $1.4 billion
is, likely, which would require South Africa to sell
at least $650 million (578 metric tons) of gold
between January and June 1971.
15. The portion of this gold South Africa is
likely to sell to,monetary authorities over the
coming year will depend to a large degree on whather
free market prices remain above $35 per ounce. As
early as last summer, several Europeen bullion
dealers, perhaps anticipating the coming monetary
calm, expressed pessimism regarding the near-term
dealers continue bearish.
to . ), Eurodollars remain quite attractive as
an investment. While short-term interest rates
Moreover, with interest rates still high
will probably decline over the next year, long-term
rates are likely to remain close to their presently
high levels for a somewhat longer'time as corpora-
tions worldwide attempt to shift from a short-term
to a long-term debt position. Consequently, to
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Table 1
Estimate of South African Gold Production and Sales a/-
Jan-Jun 1970 Jul-Dec 1970 Jan-Jun 1971
Million Million -Million
Tons US $ -Tons US $ Tons US $
Payments deficit before gold
New production
sales
Covered by:
a. Selling price is calculated at 35 per ounce and therefore excludes the small
premium on free market sales. Production is always valued at $35.per ounce.
v3
tTi
C)
480 540
Official sales 305 343 180 203 98 110
Of which:
Under price criteria 116 130 15 17 10 11
490 551 490 551. 490 551
632 711 655 737 -578 650
Free market sales 344 387 . 475 534
Payments surplus after gold
sales 17 19
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match alternative investment opportunities over the
next year, gold would have to provide a return in
excess of 10%. This would require an increase in
the free market price to around $39 per ounce. Few
dealers believe that the price will rise to this
level. ,
16. Some .'upward pressure on free market prices
could develop during the next 12 months. A growing
number of financial experts believe the present
relative calm in international financial markets
will yield to crisis before the end of the year",
because of growing concern about US balance of
payment:s. And increasing tensions in the Middle
East could result in greater demand and thus higher
prices br gold.
17. On the basis of the experience of the last
few. years, however, neither disruption of the money
markets nor the ebb and flow of Middle East hostil-
ities.is likely to have a substantial effect on near-
term gold prices. The speculative funds that raced
across national frontiers in search of windfall
gains during the, last two years had relatively little
impact on gold markets, and there is little reason
to assume that the effect of future speculative
flows will be much different. A continuing Middle
East crisis has been a permanent feature of the
postwar period and, barring all-out'war, the Arab-
Israeli conflict can be expected to contribute only
marginally to any increase in free market gold
prices.
18. For the most part, London free market.prices
through the first half of 1971 probably will range
between $35 and $38 pfr ounce, a range which will
not permit,much if any newly mined South African
gold to enter monetary reserves. South African gold
could continue to flow into the IMF coffers to the..
extent that South African payments deficits exceed
output of newly mined gold.
Soviet Gold Sales
19. European financial capitals-have been rife
with rumors of impending Soviet gold sales. In
recent years the USSR has run sizable trade deficits
with Western industrial countries and has financed
large imports of capital goods by means of medium-
term and long-term credits. Sales of diamonds have
also helped to pay for growiflg imports. World
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demand for diamonds has slackened, however. Conse-
quently, when a Soviet trade official, Vladimir
Alkhimov, in a recent issue of a Soviet foreign
trade journal, suggested gold sales as a possible
alternative for solving Soviet hard currency prob-
lems, the Western press was quick to play up the
story.* Although some Soviet gold could reach
Western markets this year, the USSR has been in
similar financial straits before and decided against
selling gold. According to present information,
the USSR plans to pay cash for imports of Western
wheat and meat this year. Long-term credits are
still available, particularly from France and
Germany. Moreover, the USSR may well be planning
additional diamond sales, knowing that DeBeers, to
protect its marketing position, would be willing
to purchase all diamonds offered. If the USSR sells
any gold, the quantity is likely to be small -- less
than $100 million -- and the effect on free market
prices is likely to be minor or transitory.
The Longer Term Outlook for Gold
20. The output of newly mined gold is not likely
to change appreciably over the next five years.
South African production, which accounts for between
75% and 80% of Free World output, is expected to
remain relatively stable-through 1975. South Africa
-almost certainly will have to selli::ost of its newly
mined gold on the free market. The.December 1969
Agreement effectively limits the amount of newly
mined gold South Africa will be able to sell to
monetary authorities. Since 1968, progressively
larger trade deficits have been financed by selling
more gold than its mines have produced. And South
African foreign exchange requirements are likely to
increase further in the next few years.
* One such article presumably based on A Zkhimov'?e
statement appeared in the 15 truly issue of Green's
Commodity Markets. Comments. Citing a "well docu-
mented rumor," the article stated that between
September and November this year, the USSR would.
sell $1 billion of its gold in the West. This would
be the equivalent of nearly one year's South African
production placed on the market in about a three-
month period.
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21. Demand is more difficult to estimate. In-
dustrial consumption of gold accounts for the largest
share of total demand, but few countries publish
useful statistics on the subject. Furthermore, in
ritany less developed countries and in a few indus-
trialized nations, a continuing demand exists for
gold in various forma -- small bars, coins, jewelry --
which in the broadest sense is-defined as hoarded
gold. Because much of this gold arrives at its final
destination through a complex network of worldwide
smuggling organizations, it is exceedingly difficult
to gauge the magnitude of demand for hoarding.
Speculative demand, such as occurred in late 1967
and early 1968, can also :be a substantial and highly
unpred,'kCtable.element in total demand. Beyond these
.problems are, others posed by unpredictable techno-
logical., economic, political, and social changes --
any of which. could have an important bearing on the
future demand for gold.
22. While agreement among, the experts is not
.complete, most believe that basic demand for free
market gold is now nearly equal to newly mined out-
put.* Realistically, basic demand can be expected
to grow at about 5% a year while gold production will
probably decline slowly. Starting.in 1972, this de-
mand for gold probably will begin to outpace newly
mined, production (.see Table 2).
23.. Beyond these. projections of basic demand,
it is necessary to-consider sales from exiting
private. stocks. Some gold presently held by individ-
ual hoarders and Zurich banks, much of it acquired
during the 1907-68 "gold rush," could well be un-
loaded in response to modest free market price in-
creases,. Given relative economic and political
stability, such sales could keep the free market
gold price well below $40 per ounce for several years.
* Basic demand is defined as the gold requirements
of industrial users plus the fairly constant demand
from traditional hoarders Of the Middle East,, the
Indian subcontinent, the Far East, and France.
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Table 2
Free World Gold: Supply and Demand
Metric Tons
1970
1971
1973
1975
Basic demand
1,200
1,260
1,330
1,390
1,460 1,530
Supply
(new production)
1,270
1,260
1,250
1,230
1,210 1,190
Excess (short-
fall)
70
0
(80)
(160)
(250) (340)
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