THE WORLD GOLD MARKET IN 1970 AND PROSPECTS FOR 1971 INTERNATIONAL FINANCIAL SERIES NO. 26

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001600040043-0
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 13
• Document Creation Date: December 12, 2016
• Document Release Date: March 7, 2002
• Sequence Number: 43
• Publication Date: March 1, 1971
• Content Type: IM

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~%~~ Secret
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DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
The World Gold 11~iarket In 1970 And Prospects For 1971
International Finarce Series No. 26
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WARNING
This document contains information affecting the national
defense of the United States, within the meaning ~f Title
18, sections 793 an3 794, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited Uy law.
GROUP 1
Eatlud~d Irom aulornallt
downgrodlnq and
dedouifitollen
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
March 1971
The World Gold Market In 1970
An Prospects For ~ 1
Introduction
Th~~.s memorandum, one of a series begun shortly
after the two -tier gold market was established in
March 1968, reviews and updates developments in
both the official and private tiers of the world
gold market through December 1970. Attention is
focused on the official gold reserve position of
the United States and on South Africa's gold mar-
keting activities. The outlook for gold in -1971
is also considered,
1970 Highlights
1. After a substantial increase in US gold
reserves during 1969, the first in 12 years, US
monetary gold stocks fell by $790 million from
the end of 1969 to the end of 1970. Most of this
decline can be attributed to two large sales to
the International Monetary Fund (IMF) .
2. The Republic of South Africa, again beset
with large payments deficits, sold gold worth more
than $1.6 bill.ion* -- nearly $480 million more
than production and nearly $400 million more than
'' This and subsequent dollar amounts are ealeu-
Zated at $35 p er troy ounce of fine gold.
Note: This memorandum teas prepared by the Offi?ee
of Economic Research and coordinated r~ithin the
Directorate of InteZZigenee.
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in 1969. Approximately 57$ went to the free mar-
ket, mostly via the Union Bank of Switzerland.
This level of free market sales was considerably
lower than had been anticipated after the conclu-
sion of the December 1969 Agreement between South
Africa and the IMF.* The reason far this was that
the fall of the free market price below the offi-
cial level of $35 per ounce early in the year
allowed South Africa, under the provisions of the
agreement, to sell substantial quantities to the
IMF.
3. Free market prices fluctuated in a narrow
range over the course of the year. At the offi-
cial level for the first two and a half months,
the price -- with the exception of a short period
in May -- remained below $36 per ounce through
August. Normal seasonal demand and a flurry of
discussion about the future of gold pushed the
price of gold above $36 in September 1970. By
October the Swiss banks were manipulating the
market by encouraging speculation while presumably
withholding gold from the market. In a mat~,er of
weeks, prices soared more than $2.50 to over $39
an ounce, but subsequently fell below $37 on a
daily basis, then rose to about $37.50 where they
stabilized for the remainder of ?the year.
The Official Market for Gold
4. US monetary gold reserves reached a two-
and-one-half-year high in mid-1970, but declined
during the remainder of the year. In the last
five months of 1970, US gold reserves fell $860
million from the July high to $11.07 billion,
their lowest level since ~~pril 1969. Much of this
decline is explained by two large transfers to the
IMF.
5. First, the IMF purchased a net $321 million,
of US gold in September: the Fund cashed in $400
million in interest-bearing US Treasury securities
~ For~tai Zs, see ER IM 70-23, The World Gold
Market In 1969 And Prospects For 1970, February
1970, SECRET
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for gold;* this gold was then sold to several mem-
ber countries, including the United States. Then,
in late December, the United States deposited
$385 millior. in gold with the IMF to cover the
increment in the 25$ gold tranche of its 1970 IMF
quota increase.** Normally, this type of reduc-
tion in gold reserves will be reflected in an
offsetting increase in a country's gold position
with the IMF. In this case, however, the United
States acted as a gold supplier for ether coun-
tries seeking additional amounts of gold to cover
their gold tranche increases.***
6. Other official US transactions during 1970
were relatively small, Purchases from US stocks
of $218 million less sales to the United States
by foreign central banks of $135 million resulted
in a further decline of $83 million in US gold
reserves. Purchases from the United States were
generally small. Of the 31 countries involved,
three accounted for 738 of the total: Taiwan
($59.8 million), the Netherlands ($50 million),
and Switzerland ($50 million). The Dutch and
Swiss purchases reflect an increase in dollar re-
serves during the year, to levels the Dutch and
Swiss found excessive, while the Taiwanese trans-
action facilitated the payment of a longstanding
debt to the IMr~'. Nine countries sold gold to the
United States during the year; three of them --
Spain ($50.8 million), Kuwait ($24.9 million), and
~' In 1956, 1959, and 1960 the IM.F invested a
total of $800 million in interest-bearing US
Treasury securities for gold to obtain operating
income and to provide a reserve toward meeting
possible future deficits. By 1970, IMF earnings
from these securities were considered large enough
so that half of them could be resold to the US
Tre asury~
** The US quota was increased, according to an
IMF resolution adopted 9 February 1970, from
$5,160 mi Zlion to $6, 700 mi Z lion. The $385 mi Z-
lion gold sale represents the portion o f the
quota increase that must be paid in gold -- that
is, 25?6 is the "gold subscription. "
~~* These sales totaled $548 million; the ma,~or
purchasers being France ('5129 miZZionJ, Japan
($119 miZZionJ, India ($30 miZZionJ, and Mexico
($25 miZZionJ.
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Burma ($207 million) -- accounted for nearly 71$
of total 1970 central bank sales to the United
States.
South African Gold Sales in 1970
7. Faced with a record payments deficit for
the second year in a row, South Africa in 1970
sold its entire output of newly mined gold as well
as some previously accumulated. Total sales of
$1.6 billion exceeded current output by nearly
$480 million (see Table 1). While much of this
gold entered the free market, a much larger than
anticipated portion (approximately 43$) was sold
to the IMF and other monetary authorities.
8. During 1970, South African gold sales to
monetary authorities totaled $669 million; all but
$49 million went to the IMF. Under the provisions
of the December Agreement, South Africa may sell
a specified amount of gold to monetary authorities,
primarily the IMF, under the "price formula."
This occurs when the free market price, as re-
flected in the two daily London fixings, is at
or below $35 per ounce, Sales under this crite-
rion were about $125 million. South Africa may
also sell gold to the IMF at $35 per ounce less
a handling charge under the "deficit formula" --
that is, to cover any payments deficits during
semi-annual periods after treating newly mined
gold as an export. Sales under this formula were
almost $350 million. Finally, South Africa was
allowed to sell small amounts of gold quarterly
from reserves accumulated prior to the establish-
ment of the two-tier system. Eligible sales under
this provision were exhausted during the fourth
quarter of 1970~* Although large sales under the
deficit formula were anticipated, the lengthy
period of depressed free market prices (early
January through mid-March) enabling South Africa
to sell $125 million under the price formula was
unexpected.
* The 168 mi-Z Zion sold under this provision also
includes an ad hoc $34,8 miZtion reflecting an
earlier commitment to Pretoria by the IMF.
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South African Gold Reserves
as of 31 December 1970 f
Million US $
Reported reserves (31 December
1969)
1,115
Production (1970)
1,130
Supply before sales
2,245
To the IMF (under December
Agreement)
6
40
Including:
Price formula
Deficit formula
Pool
124.7
347.0
168.3
To other monetary authorities
49
Including:
French IMF rand drawing
22
Mozambique
4
Switzerland
23 b/
1,608
Reserves (31 December 1970) G66
Unexplained difference c/ 29
a. For eonsistenay in analysing reserve data,
values are caZauZated at $35 per troy ounce of
fine gold.
b. Sr~iss share of South African gold under the
December Agreement.
a. Possibly obtained from South African Chamber
of Mines.
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The Free Market for Gold
9. South Africa's free market sales during
1970 totaled $919 million (815 metric tons, see
Table 2).* Although the Union Bank of Switzerland
continued to purchase the lion's share (755 tons),**
60 tons were probably sold to non-Swiss customers.
Hrnile positive identification of these purchasers
has not been made, there is evidence that some of
this gold was purchased by London banks and bul-
lion dealers. More than 608 of the Union Bank
total was purchased f.o.b. Johannesburg and flown
to Switzerland aboard aircraft operated by Balair,
a Swissair subsidiary. The remainder, sH ipped by
sea to England, was flown from London to Zuric:::.
10. Although free market prices moved in a
rather narrow range during much of 1970, the pat-
tern of these movements gave rise to suspicions
that Union Bank was attempting to manipulate the
market. The year began with prices at just
slightly above $35 an ounce and almost immediately
the price fell several cents below this level (see
the chart). Through mid-March, free market prices
hovered at or near $35 per ou.~ce. Thus, while
South Africa was selling much, of its newly mined
gold to the IMF under the price formula provisions,
the free market price indicated virtually no in-
crease in demand for gold at a time when jewelers
and artisans would normally start replenishing
their inventories.
* The actual prise paid South Africa averaged
nearly $35.75 per ounce for the year, an amount
approximately 25 cents below 197U's mean free
market price. Such a premium over the official
price would provide South Africa r~ith an addi-
tional foreign exchange of about $20 million.
*'* After the es tabZishment of the two-tier sys-
tem, Zurich's three largest banks, Union Bank of
Srui tzerland, Swiss Banking Corporation, and the
Sr~ise Credit Bank, formed a consortium to pureh?se
newly mined South African gold. In mid-1969 the
bullion manager of Sr~iss Credit Bank, convinced
that gold at that time was a poor investment, with-
drew from this consortium by selling virtually alt
of his bank's gold on the free market. At present,
the Swiss consortium appears to be Zn operation
once again r~ith the Union Bank stitt playing the
dominant rote.
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London Weekly Gold Pr4ces,1970
US S PecTroy Ounce of Fne Gald
40.0
39.5 --
i
39.0 : -
1
i
38.5 -
a
38.0 ~ -
t
37.5 ~-
37.0 : -
36.5 i--
36.0 -
i
35.5 ~ -
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South African Free Market Gold Sales
19 70
a. Based on the official prioe of S35 per troy
ounce of fine gold.
n
11. After mid-March the price gradually rose,
reaching a peak of just slightly above $36 per
ounce for a few days in May. Subsequently, how-
ever, the price retreated approximately 75 cents
where it remained through August. By September,
prices began moving upward again in response to
a seasonal increase in demand from the jewelry
trade and Middle Eastern hoarders. Then in mid-
October the price jumped more than $2 in about a
wee]c. Although same of the October rise can be
attributed to the proliferation of studies and
speeches heralding a new era for gold, it was
mainly caused by a drop in gold supply. The Union
Bark of Swit2erland probably withheld from the
market all or most of the South African gold being
received. 'Phis policy was successful in forcing
a sharp rise in the free market price until the
point at which offerings from hoarders became too
large to absorb. Consequently, the free market
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price settled back to the $37.50 level by the end
of October where it remained relatively unchanged
throughout the rest cif the year.
Outlook
South Africa's estimated balance-cf-
payments deficit for 1971, although smaller than
the record 1970 shortfall, will still be in a
range of $200-$300 million after including sales
of all newly mined geld as export~.* Since there
is little likelihood that the free market price
will fall to $35 per ot~.nce -- a condition which
would allow South Africa to sell a portion of its
newly mined gold to the IP4F -- virtually all of
South Africa's 1971 gold output -- $1.1 billion
at $35 pEr ounce -- will enter the .fre a market.
The deficit will. be covered by gold sales of $200-
$300 million to monetary authorities, primarily
the IDlF, from reserves now in the vaults of the
South African Reserve Bank. Accordingly, South
African gold reserves could fall to about $370 mil-
lion by the end of 1971.
13. Free market gold demand principally for
industrial purposes and normal hoarding (mainly
in less developed countries) will probably be on
the order of $1.6 billion in 1971. The free mar-
ket supply will probably be approximately the
game as demand. Gild output of Free World pr~-
ducers other than South Africa is estimated at
$300 million while another $150-$200 million
should be available from the hoards accutr~ulated
during the 1967-68 run on the London Gold Pool
at prices not far above $35 an ounce. i~hus, un-
less the Zurich banks are able to manipulate the
market successfully, the free market price seems
likely to remain under $40 rer ounce during 1971.
During the first two moths of 1971, the price
was usually in the $38,00 - X38.80 range.
For ana yszs, see ER IM 71-22, South Africa;
Balance-Of-Payments Prospects, Februarx~ 1971,
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14. The outlook fir the official tier is less
bright. Impatience with large US balance-of-
payments deficits, which seems certain to occur
again in 1971, has increased abroad, particularly
among European central bankers. They are likely
to redeem dollars for gold at a much faster rate
in 1971 than was the case in 1970.
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