INTELLIGENCE MEMORANDUM RECENT TRENDS IN THE FREE GOLD MARKET INTERNATIONAL FINANCE SERIES NO. 25

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001600030162-9
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 8
• Document Creation Date: December 22, 2016
• Document Release Date: October 25, 2011
• Sequence Number: 162
• Publication Date: October 1, 1970
• Content Type: IM

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DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
Recent Trends In The Free Gold Market
International Finance Series No. 25
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October 1970
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
October 1970
INTELLIGENCE MEMORANDUM
Recent Trends In The Free Gold Market
Introduction
After about a year of relative stability, gold
prices on the world's free markets jumped nearly $3
per fine ounce in October. This memorandum attempts
to explain the reasons for the recent sharp rise in
free market gold prices and assesses the outlook for
these prices in the near term.
Back rg ound
1. The world's major free gold market centers --
London and Zurich -- lost much of their lethargy in
October when prices spurted above $39 per troy ounce
of fine gold for the first time since early November
1969. For most of 1970, prices stabilized near the
official level of $35 per ounce. Then in early
September prices climbed above $36. After trending
slightly upward through the remainder of the month,
prices advanced another $3, reaching as much as
$39.50 on 26 October; prices fell to about $38.00
on 29 October.
Analysis
2. South Africa has been marketing virtually
all of its newly mined gold in an orderly manner
in the free market -- 300 tons, worth some $347 mil-
lion at $36.00 per ounce -- in the last three to
Note: This memorandum was produced solely by CIA.
It was prepared by the Office of Economic Research.
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four months. In the absence of any monetary crises
there seems to be no obvious explanation for the
recent substantial price increases for gold. There
is, however, strong circumstantial evidence that
Zurich bullion dealers, under the leadership of
the Union Bank of Switzerland, are again manipu-
lating the gold markets. London bullion dealers
had hoped that the 1969 "December Agreement"
between the International Monetary Fund (IMF) and
South Africa* would restore London to its former
position as the focal point of the world gold mar-
ket. It has not. We have no evidence whatever
that South Africa during 1970 sold an ounce of gold
to any free market dealer other than the Union
Bank.**
3. Throughout October 1970, Zurich has been
rife with rumors that the presence of large buyers
in the market has resulted in heavy trading volumes.
There is little basis, however, for presuming that
trading volumes have risen substantially above the
thin 15- to 20-ton weekly maximums quoted in mid-
1969. (Zurich dealers discontinued their practice
* This agreement enables South Africa to sell
gold to monetary authorities, primarily the IMF
(1) when the free market price drops to $35 per
ounce or below, and (2) when South African balance-
of-payments deficits exceed receipts from the free
market sale of all newly mined gold. (It was under
this first provision that about one-half of South
Africa's $307 million sales during the first half
of 1970 entered IMF repositories.) Because the
price criterion has not been operative since early
March, South Africa has been obliged to sell vi:r-
tuaZZy all of its newly mined output on the free
*^ It is not certain whether the Union Bank is
currently acting alone or whether some form of the
1968-69 Zurich Consortium consisting of the Union
Bank, the Swiss Banking Corporation, and the Swiss
Credit Bank has been reestablished.
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of posting weekly trading volume more than a year
ago.) Several London dealers believe that the
free gold market is reacting to moderate Continen-
tal buying and an almost complete absence of selling.
4. The present situation implies effective
control of free market supplies by the Swiss com-
mercial banks. For now, at least, Union Bank as
the major influence in the Continental gold market
is probably in a position to manipulate the market
price. Furthermore, Union Bank's actions are well
timed to coincide with, a number of recent events,
coincidental or otherwise, that provided the ini-
tial impetus for free market price increases in
late August. In June 1970 the second of two recent
studies on worldwide demand for gold was published
by Charter Consolidated, an affiliate of South
Africa's Anglo American Corporation. This study,
like the one prepared some months earlier by Con-
solidated Gold Fields, concludes that gold demand
from both industrial users and hoarders* already
exceeds annual free world output. Gold demand
from these two sources normally shows a seasonal
increase toward the latter part of the third quarter
when jewelry manufacturers rebuild their inventories
for the coming year and when smugglers, following
the monsoon season, again are active between Dubai
on the Persian Gulf and the Indian subcontinent.
Then, several less-than-disinterested, although
respected individuals** made similar statements
pointing to the inevitability of the free market
gold price rising to as much as $100 per ounce by
1980.
5. The most recent attempt by Zurich to in-
fluence free market prices came in late October
* This etion includes medium-term holders
as opposed to speculators who seek relatively
quick profits.
** The financial press cited the statements of
individuals such as Dr. Nieolaas Diederichs, the
South African Minister of Finance, Dr. Milton Gil-
bert, Economic Advisor to the Bank for Interna-
tional Settlements in Bas le, and Paul Jeanty of..
Samuel Montagu, one of London's five bullion
dealers, who have especially noted the sizable US
payments deficit in 1970.
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with the pronouncement that the "overhang"* created
during the "gold rush" of late 1967 and early 1968,
had been fully absorbed by the system. Prior to
the establishment of the two-tier market in mid-
March 1968, speculators and quasi-hoarders drained
$3.2 billion in monetary gold from the London Gold
Pool. This gold has indeed been gradually finding
its way into industrial uses and permanent hoards.
b. It is difficult to estimate the present
size of the overhang, although there clearly is a
pool of privately held gold that will continually
find its way into the free market as prices move
upward. At the end of 1969, David Lloyd Jacob,
author of the Consolidated Gold Fields report,
estimated the overhang to be $1 billion (890 tons
valued at $35 per ounce); other estimates made at
the same time (none have been made more recently),
including one by Alexander Hay of Switzerland's
Central. Bank, ranged as high as $1.8 billion. We
believe that the latter figure is probably the
more likely and that the overall private demand
for gold now about equals annual Free World output.
On this basis, industrial users and hoarders througth
mid-October would have purchased approximately 1,000
tons. This current demand exceeds the free market
supply of newly mined gold by about 150 tons --
roughly the amount South Africa sold to the IMF
under the December Agreement. The $1 billion over-
hang estimated by Jacob is more than enough to
allow for increased speculative activity and cover
the 150-ton shortfall.
7. What the Union Bank hopes to achieve by its
manipulative activities is to stimulate speculative
demand for gold; they may believe the free market
price can be forced beyond the $50 per ounce level.
In any event, the Union Bank and its associates
clearly are desirous of recouping some of last
year's losses accrued during the precipitous decline
in free market prices in October and November 1969.
* The overhang is a catchall phrase covering
potential free market supplies that have not yet
gone into either industrial uses or permanent
hoards such as those in France, the Indian subcon-
tinent, and the Far East.
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The Outlook
8. The long-term trend for free market gold
prices is upward. Worldwide industrial demand,
now estimated at between 800 and 900 tons annually,
is growing at a rate of about 5% a year. The recent
sharp rise in the free market price, however, ap-
pears to be a short-term aberration caused by tam-
pering with normal market forces. The Swiss banks
responsible for precipitating this development are
presently faced with large and growing inventories
of gold, which now could exceed $450 million --
400 tons at $35.00 per ounce. While they probably
have the resources to increase this stockpile
further, the Swiss banks will almost certainly
begin to sell some gold soon. The fall in free
market prices during the last week of October may
be evidence of this fact.
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