INTERNATIONAL FINANCE SERIES, NO 7 THE WORLD GOLD MARKET

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001600010084-8
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 19
• Document Creation Date: December 22, 2016
• Document Release Date: October 1, 2009
• Sequence Number: 84
• Publication Date: October 1, 1968
• Content Type: IM

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Secret
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
International Finance Series, No. 7
The World Gold Market
Secret
ER IM 68-134
October 1968
Copy No
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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 by an unauthorized person is prohibited by law.
GROUP I
Excluded from oulemallc
downgrading and
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
22 October 19F8
INTELLIGENCE MEMORANDUM
International Finance Series, No. 7
The World Gold Market
Summary
During September 1968, another French gold sale
of $85 million left the United States with a net
gain of $73.5 million for the month. Purchases from
the United States in September were $11.5 million,
the lowest since establishment of the two-tier market
in mid-March. Argentina, with a purchase of $5 mil-
lion, was the biggest buyer.
Increasing confidence in the world monetary
system appears to be at least partly responsible for
he steady decline in demand for US gold. In early
October, Argentina bought another $5 million but
this was offset by a Philippine sale of an equal
amount to the US. At the end of the first week in
October only one sale of US gold -- another $5 mil-
lion to Argentina scheduled for early November -- was
anticipated for the remainder of 1968.
The French sale in September brought to $460
million the total France has sold to the United
States since inid-May and enabled the United States
to show a net gain of $53 million in its gold position
for the second and third quarters of 1968. As a re-
sult of their domestic crisis, the French saw their
gold reserves reduced by $1.07 billion between mid-
May and late September.
Reexamination of South African statistics on
gold reserves and gold production reveals that for
the first three quarters of 1968 the South Africans
sold $330 million w''rth of gold, roughly 25 percent
Note: T zs memorandum was produced soieZy by CIA.
It was prepared by the Office of Economic Research.
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of which left South Africa in the first quarter,
prior to establishment of the two-tier system. From
mid-March to early June, the South Africans withheld
gold from the free market. Subsequent sales during
June were only $62 mi!.lion, including $42 million
sold to France and the United Kingdom for repurchase
of Rand obtained through IMF drawings. Third-quarter
sales were $175 million, mainly to Swiss commercial
banks and the Portuguese Central Bank, and accounted
for more than half of total 1968 sales to date.
South Africa's ability to limit its gold sales
has been increased by the nation's relatively
favorable balance of payments compared with previous
years. The trade deficit has been smaller, while
capital inflows have been larger than normal. The
non-gold balance of payments has begun to worsen,
however, and South Africa will have to sell. additional
amounts of gold in the fourth quarter of 1968 unless
it is willing to run up short-term debts to foreign
banks.
Previous issues in this series have featured
background sketches on major world gold markets.
This issue focuses on the organization and operations
of the Hong Kong-Macao market, the smallest and most
complex of the major gold markets. Hong Kong is a
principal financial and commercial center .n the
Far East, a status uniquely suiting it for primacy
in the regional gold trade. However, its govern-
ment permits gold imports only for purposes of re-
export and only if such reexports comply with import
regulations of the countries of destination, Hence,
in order to obcain gold for use in the Far Eastern
smuggling trade, dealers engage in a complex system
of legal reexports to Macao, where gold is recast
into smaller bars and then returned to Hong Kong
illegally via a well-established smuggling net.
The overt stage of legal import and legal reexport
of gold to Macao -- which amounts to between 3.3
and 5.0 tons per month -- is undertaken by firms
associated with well-known names in the world gold
trade. The Macao operation, on the other hand, is
undertaken by a syndicate composed of persons of
more clouded reputation, while the smuggling trade
out of Hong Kong to customer areas in the Far East
(primarily Japan, India, and Indonesia) is
handled by a number of persons and groups about
which relatively little is known.
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The Official Market for Gold
1. During the month of September, another French
sale of gold to the United States of $85 million (see
Table 1) more than offset US officials les of $11.5
million, which is the lowest monthly level of US
sales since the establishment of the two-tier system
in March 1968. Argentina, with a purchase of $5
million, led the list of buyers. Malta and Burma,
desiring to reduce their sterling balances, each
acquired $2.5 million. In early October, Argentina
purchased an additional $5 million, whereas the
Philippines sold an equal amount to the United States.
The only transaction presently anticipated for the
remainder of 1968 is another $5 million sale to
Argentina scheduled for early Novemi-er. Previously
reported orders, which totaled $124 million, of which
$95 million came from Portugal, have been cancelled.
2. The French sale of $85 million during Sep-
tember brings to $460 million the amount of gold
sold by France to the United States since the French
domestic crisis erupted in mid-May. These sales
enabled the United States to show, on balance, an
increase of $53 million in its gold stock since the
end of the first quarter of 1968. France, on the
other hand, has seen its gold reserves depleted by
$1.07 billion between nmid-May and the end of September.
On 30 September, French gold reserves stood at $4.16
billion.
The Free Market for Gold
4. During the first half of September, prices
in London and Zurich continued a climb that had be-
gun in late August. By mid-month, gold in London was
selling at $40.55 while in Zurich the price reached
$40.65 per troy ounce. These prices generally
prevailed until just prior to the annual meetings
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of the International Monetary Fund (IMF) and World
Bank (IBRD) , when speculators, ,apparently concerned
about the possibility of a settlement with South
Africa, unloaded abnormally large amounts onto the
market. Within less than a week, the London price
dropped $2.25 to $38.30, the lowest level in more
than two months. At that price, however, industrial
users and others quickly entered the market to build
up inventories, and the price: recovered to $39.80 by
Monday, 7 October. The same pattern was evident in
the Zurich market. (Weekly ranges of gold prices
in London and Zurich are shown in Table 2 . )
Review of South African Gold Sales During 1968
5. A reexamina--i,n of official South African
statistics for the first three quarters of 1968 shows
that the South Africa;i Reserve Bank sold approximately
$330 million* worth of gold or nearly $500 million
below the normal level .of gold sales for comparable
periods in recent years. A month-by-month estimate
for 1968 reveals sales of $ 71 million in January
and February and an additional $22 million in March
(Table 3)) . Probably all of the gold sold during the
first quarter went to London under the arrangements
existing prior to establishment of the two-tier market.
No sales were made in April, and only small amounts,
if any, were sold during 'May. In June the South
African Reserve Bank sold $42 million to the central
banks of France and the United Kingdom to redeem an
equal amount of its own currency issued as part of
previous French and UK drawings on the IMF. The
residual of $20 million sold in June is part or per-
haps all of the free market sales announced in mid-
July by Minister of Finance Diederichs as having
occurred during May and June.**
* AZZ gold values are expressed in terms of $35.00
per ounce. The South Africans actually value their
own reserves at a statutory rate of 24.8 Rand per
ounce, equivalent to $34.72 per ounce at the official
Rand/DoZZar rate of 1 Rand to $1.40.
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6. During the third quarter of 1968 the South
African Reserve Bank apparently sold $175 million
in gold, as revealed by a comparison of estimates
of gold production and data on changes in South
African gold reserves.
The Portuguese Central Bank purchased
a total of 100 tons worth nearly $113 million, where-
as the consortium headed by the three major Swiss
commercial banks took slightly over $54 million.*
7. Although the difference between imr.].icit
South African sales and those positively confirmed
amounts to only $8 million on a net basis for the
third quarter as a whole, month-by-month comparisons
show wider discrepancies. Confirmed sales were
smaller than implicit sales in July by $29 million
and exceeded implicit sales by $13 million in August
and by $8 million in September. These discrepancies
probably cannot be explained by monthly variations
in gold production. In the past, such variations
have been very small -- on the order of $1 million.
The discrepancies could be the result of changes in
inventories of refined gold held by the Chamber of
Mines,** and/or of incomplete information on specific
gold sales. The latter possibility appears to be
remote for August and September because known sales
exceeded the implied total in both months. It is
possible that there were some unreported sales in
July. Accumulation of some gold inventories by the
Chamber of Mines makes sense, if there is any in-
tention of initiating direct export of gold by this
organization in the future (see paragraph 10 below).
The Camber of Mines is owned jointly by the
seven South African mining companies. It coordinates
industry policy through its refining and marketing
operations for which it is given sole responsibility.
At the mine facilities, gold is smelted into bars
containing 85 to 90 percent pure gold and is then
shipped to the Chamber's Rand refinery at Germiston,
near Johanne ?~urg, where it is refined into 12 1/2
kilogram are containing 90G parts per thousand pure
gold. The Uhamber then sells the refined bars to the
South African Reserve Bank.
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8. South Africa's ability to hold its gold
sales far below normal has been greatly enhanced by
the sharp improvement in other components of its
balance of payments. Normally, South Africa must
export virtually all of its newly mined gold to off-
set substantial deficits on current account. During
the first nalf of 1968, however, capital inflows
were much larger than normal and the trade deficit
(excluding gold) was smaller than normal. The net
capital inflow totaled $178 million in the first
quarter and $110 million in the second quarter, com-
pared with a quarterly average of $47 million last
year. South Africa received long-term loans from
Switzerland and a substantial inflow of funds from
the United Kingdom, much of which represented
purchases of gold mining shares. The reduction in
the trade deficit from a quarterly average of $237
million in 1967 to $115 million a quarter in the
first half of 1968 reflects a boom in agricultural
exports as a result of favorable weather and a drop
in imports, stemming mainly from a slowdown in in-
vestment activity. As a result of these favorable
trends, the combined current and capital accounts
(excluding gold) were nearly in balance in the first
quarter and were in deficit by only about $100 mil-
lion in the second quarter. This deficit increased
to an estimated $210 million in the third quarter
as a result of a drop in both non-gold exports and
the capital inflow. But for the first three quarters
combined, the balance-of-payments deficit (excluding
gold) is slightly smaller than gold sales. Gold
sales were greatly in excess of the deficit in the
first quarter and did not cover the deficit in the
second and third quarters. On balance, the net
foreign exchange assets of the South African banking
system have hardly changed since the beginning of
the year.
9. South Africa's balance of payments is likely
to deteriorate during the fourth quarter. Nevertheless,
Finance Minister Diederichs is correct in his recent
statement that there is no necessity for South Africa
to sell gold in the near future, if the South Africans
are willing to finance their deficit by moderate
external borrowing. Exports are expected to decline
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as agricultural stocks accumulated from the record
crops in 1967 are drawn down. The capital inflow
had already tapered off in the third quarter and is
not likely to rebound in the fourth quarter. With-
out any gold sales, the balance-of-payments deficit
for the fourth quarter is forecast to reach at least
$235 million. Such a deficit, however, while i*
exceeds South Africa's 1 October foreign exchange
holdings of about $210 million, could easily be
financed through loans from foreign banks. Indeed,
South Africa could finance deficits of this magnitude
for a considerable time in this manner, if it wished
to do so.
10. Nevertheless, it seems likely for several
reasons that South Africa will sell gold during the
final quarter, following the same judicious procedure
it has exercised since March 1968. The arrangement
offered by the consortium headed by Swiss banks is
still available as a convenient channel for sales
to the free market. Finance Minister Diederichs and
Governor DeJongh of the South African Reserve Bank
are returning to South Africa from the IMF/IBRD
meetings via Western Europe. Their agenda includes
informal discussions with a number of European
commercial bankers and undoubtedly the subject of
South African gold will loom large in the talks.
Finally, since mid-August, government officials and
members of the Chamber of Mines have been seriously
examining possible courses of action not previously
considered, in particular selling gold outside tl.a
European markets. Outlets under consideration in-
clude the Middle East (probably both Beirut and
Dubai) , India, and the Far East, particularly Hong
Kong.*
* Because of the covert nature of these markets,
the South African Reserve Bank probably will avoid
direct involvement in Middle Eastern and Far Eastern
gold sales, preferring to let the Chamber of Mines
conclude all transactions. Under South African law
the Chamber of Mines is obligated to offer all newly
mined gold to the South African Reserve Bank, but
the Reserve Bank is not required to accept all gold
(footnote continued on page 10.)
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The Hong Kong-Macao Gold Market
11. Outside Europe, Beirut and Hong Kong-Macao
stand out as important gold trading centers. Both
are entrepots for extensive smuggling nets, extend-
ing throughout the Middle East and the Far East,
respectively. The organization and operation of
tra Beirut gold market were examined in a previous
i.;sue in this series.
12. The Hong Kong-Macao market is considerably
more complex and less well-known than its Lebanese
counterpart. It owes its present status to a Hong
Kong governmental regulation of October 1953 which
authorizes the import of gold only for reexport with-
in a specified time, providing that the reexports
comply with the import licensing requirements of
the countries of destination. Under this regula-
tion, the unique "twist" in this market has emerged.
Gold is legally imported into Hong Kong and legally
reexported to Macao, where it is recast into smaller
bars .
offered. Information co,,Zected to date, however,
gives no indication that the Reserve Bank has ever
refused gold offered to it. Should the Bank at any
time choose not to accept gold, the Chamber of Mines
is free to dispose of this excess as it sees fit.
In the interest of the mining companies, the Chamber
may well decide to seZZ where it can get the best price.
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/ The close family ties
maintained by the Chinese in Hong Kong with other
Chinese throughout Asia also have facilitated Hong
Kong's functioning as a regional gold market.
13. Prior to the establishment of the two-tier
gold market, gold legally flowing into Hong Kong
came from London (about 50 percent) and Australia
(40 percent); with most of the remainder coiin
a i lon these ega imports, undetermined
amounts have been smuggled into Hong Kong from the
Middle East, especially since the free market came
into being.
14. Traditionally, legal imports into Hong Kong
have been substantially smaller than supplies flowing
through the large European and Middle Eastern markets,
while prices have usually been a dollar or so higher
(see Table 6), largely as a result of transportation
costs. Throughout the mid-1960's, volume has ranged
from 40 tons to 60 tons a year, or between 3.3 and
5.0 tons a month. Although a peak of 5 tons was
purchased in March 1968, volume has since declined
significantly, owing at least in part to reduced
demand.
15. Three foreign exchange and investment firms --
Mount Trading Company, Commercial Investment Company,
and Premex -- are licensed to import gold into
Hong Kong for reexport only. For a standard fee of
US $0.20 an ounce, these three firms pick up the
gold at the airport or harbor and place it in their
warehouses prior to reexport. All gold entering
Hong Kong in this manner -- mostly bullion but som..
coins as well -- is eventually shipped the 40 miles
to Macao* aboard hydrofoils of the Hong Kong-Macao
Small amouwits equivalent to Zess than one-third
of a ton are known to have been shipped to Sarawak
(Borneo) in 1962 and to Laos and Thailand in 1964.
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Hydrofoil Company Ltd., a firm owned by the Sindi cato
de Ouro, the Macao gold. syndicate.
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Actual and Planned Transactions in Gold with the United States
September-December 1968
Planned
1-30 September 1-4 October Purchases
from the US
Purchase Sale Purchase Sale 5 October to
Country from the US to the US from the US to the US End of Year
France 95.0
Argentina 5.0 5.0 5.0
Philippines 5.0
Burma 2.5
Malta 2.5
Ireland 1.0
Mauritius 0.3
Liberia 0.1
Somalia 0.1
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Table 2
Price Range in the London and Zurich
Gold Markets
2 September-4 October 1968
US $ per Fine Ounce
Week London a/
Zurich _/
2 - 6 Sep 39.90 to 40.10 38.80 to 40.25
9 - 13 Sep 40.00 to 40.25 39.85 to 40.40
16 - 20 Sep 40.20 to 40.55 39.95 to 40.65
23 - 27 Sep 40.125 to 40.475 40.20 to 40.60
30 Sep - 4 Oct 38.30 to 39.70 39.00 to 39.70
a. Based on morning and afternoon fixes.
b. Not exactly comparable with London; these
data consist of the lowest offer to buy and the
highest offer to sell during the week.
Estimated Monthly South African Gold Sales
January-September 1968
Million US $
Month
Value Month Value
January
48
June
62
February
23
July
63 a/
March
22
August
78'a/
April
0
September
34 a/
May
0
Total
330
a. Inc u ea known sales plus or minus
discrepancies from sales implied by
production and reserve data. (See Table 4
and paragraph 7 of text.)
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South African Gold Transactions a/
July-September 1968
July
Reserves reported by South Africa, 30 June 975
Reported production for July
91
Total estimated reserves before sales 1,066
Known sales
1 July: To Portuguese Central Bank (30 tons)
Estimated reserves after known sales 1,032
Reserves reported by South Africa, 31 July 1,003
Discrepancy b/ 29
!August
Reserves reported by South Africa, 31 July 1,003
Estimated production for August 91
Total estimated reserves before sales 1,094
Known sales
5 August: To Portuguese Central Bank (40 tons) 45.0
7 August: To Swiss commercial banks (8.5 tons) 9.6
16 August: To Swiss commercial banks (8.5 tons) 9.6
21 August: To Swiss commercial banks (8.5 tons) 9.6
21 August: To Portuguese Central Bank (15 tons) 16.9
Estimated reserves after known sales 1,003
Reserves reported by South Africa, 31 August 1,016
Discrepancy b/ -13
September
Reserves reported by South Africa, 31 August 1,016
Estimated production for September 91
Total estimated reserves before sales 1,107
Known sales
3 September: To Swiss commercial banks (11.4 tons) 12.8
11 September: To Swiss commercial banks (11.4 tons) 12.8
16 September: To Portuguese Central Bank (15.0 tons) 16.9
Estimated reserves after known sales 1,065
Reserves reported by South Africa, 27 September 1,064
Adjustment to 30 September 9
Adjusted South African reserves, 30 September 1,073
Discrepancy b/ -8
a. Because of roun ding, components may not add to the totals shown.
b. Most of the "discrepancies" shown probably are due to irregularities in
the flow of gold from production -- which is fairly stable on a month-to-month
basis -- into reserves. This judgment is based on analysis of production
data and reserve data for the January-July period.
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Estimated South African Quarterly Balance of Payments
1968
Million US $
Third Fourth
First Second Quarter Quarter
Quarter Quarter (Estimated) (Forecast) Total
Current account (excluding gold)
Merchandise exports, f.o.b.
555
550
490
465
2,060
CD
I
Merchandise imports, f.o.b.
-665
-670
-665
-665
-2,665
Trade balance
Net service and transfer
-110
-120
-175
-200
-605
y
payments
-75
-95
-95
-95
-360
Balance on current account
-185
-215
-270
-295
-=965
Net capital movements
Balance on current and
178
110
60
60
408
capital account
-7
-105
-210
-235
-557
Financing of deficit
Gold sales (monetary and
7
105
210
235
557
nonmonetary)
Change in net foreign ex-
change assets and residual
(negative sign indicates an
increase in assets, a posi-
93
62
175
N.A.
N.A.
tive sign a decrease)
+86
-43
-35
N.A.
N.A.
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Table 6
Gold Bullion Imports into Hong Kong
1966 - June 1968
Year and Month
Quantity
(Metric Tons)
Price
(US $ per Fine Ounce)
1966 (monthly average)
3.6
36.08
1967 (monthly average)
4.6
36.76
1968
January
3.0
35.48
February
1.5
35.53
March
5.0
36.26
April.
1.8
37.95
May
1.4
42.61
June
0.6
41.77
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