'INVESTING' IN GOLD
By NICHOLAS DAVENPORT IN their annual bullion review Samuel Montagu write this very curious sentence : 'Whilst there was a notable decrease in the normal hoarding demand for gold, investment demand was exceptional in 1958.' I can under- stand the first part, for on the one hand the disturbances in Indo- nesia and the Middle East inter- rupted the normal gold traffic in these regions, and on the other M. Pinay's gold loan last summer, redeemable by annual drawings at prices based on the market rates for the gold Napoleon, led to a grand dis- hoartling of gold in France, amounting, so the authors say, to about 3 million ounces. But who has ever heard of 'investing' in gold? Samuel Montagu may be correct in their use of English— the act of investing being the laying out of money for income or profit—but 'speculation' would surely be a better word for it. The particular 'investment' to which they call attention is merely a speculation upon the price of gold being written up in the currency of the speculator. The signifi- cant fact is that while the private hoarding demand last year fell, according to Samuel Montagu, from 7+ million to 4 million ounces ($140 million), speculation or 'investment' in gold rose from I+ million to 8 million ounces ($280 million), bought mainly in Ziirich, London and Canada. The buyers, they say, were private individuals, institu- tions and some foreign governments.
To see this curious traffic in its proper perspec- tive, note that the total world production ot gold is put at 30,200,000 ounces, excluding the USSR. Thus, 40 per cent. of the new gold of the free world (or $420 million) was taken and put away by hoarders, whatever you may care to call them.' This is an astonishing confession of lack of con- fidence in the currencies of the non-Cpmmunist nations. Russian production is said to be about as large as the South African, which was up to 17,666,000 ounces last year, but there is no proof of this estimate and I would doubt it very much.
It seems unlikely that the Soviet Government would waste so much of her resources in mining gold. It may be significant that Russian sales of gold dropped to 6 million ounces last year. The idea that a writing-up of the price of gold by 100 per cent, would give too great a profit and advan- tage to Russia is, in view of her vast resources, ludicrous. Even if she produced 12 million ounces, what is an extra $420 million in terms of the Russian gross national product?
But to come back to this hoarding business. Speculation on a rise in the price of gold has obviously been stimulated to no small degree by the American loss cif $2,300 million of gold last year. The United States has no balance of pay- ments problem on trading account; exports, although falling, are still in excess of imports; but payments abroad for defence and foreign aid coupled with increasing private investment in Europe and elsewhere account for the gold loss. For the moment the drain has stopped but the problem has not been solved. The payments abroad for defence and foreign aid are a vital part of the American Government's external policy and the increasing investment of American capital in foreign production is the sign of growing dis- quiet with the rising costs of domestic production. In so many industrial fields it is now cheaper for the American manufacturer to produce abroad. The gold speculator therefore looks not at the trading account but at the capital account of the United States.
The American gold stock at the moment stands at $20,500 million, of which nearly $12,000 mil- lion is reserved as the 25 per cent. backing legally required for the Federal Reserve banks' notes and deposits. The gold ratio could be reduced again by legislation, but this is not likely politics in the light of the prevailing fears of inflation. The free balance of $8,500 million is barely sufficient to cover the short-term dollar assets held by foreign governments and central banks. Moreover, private firms and individuals abroad have short-term dollar assets worth about $6,000 million quite apart from the thousands of millions of dollars invested by foreigners in Wall Street. If the foreign governments and banks took fright and converted their dollar assets into gold, if the private investor followed suit, the American Treasury would have to protect itself by clapping an embargo on gold sales. This was exactly what it did in 1933 and the price of gold eventually rose from $20.67 to $35 an ounce. If a new crisis were to arise this year or next and another embargo were to be imposed, there would be, say Samuel Montagu, 'an im- mediate and substantial rise in the dollar price of gold outside the United States.' In other words, the dollar would devalue itself.
A new crisis could arise without doubt. A bad strike and settlement in, the steel industry which raised steel wages sharply could lead to a new scare about a wage-cost or 'cost-push' inflation; it could not only induce foreign institutions to Convert their dollar assets into gold but cause Americans to invest more abroad or buy gold in Canada or Zilrich. Again, a still wilder boom on Wall Street could persuade the Federal Reserve to make money dear enough to bring on another sharp recession. I referred to the possibility of this monetary madness last week. To prick the stock market bubble all that is really needed is to freeze margin accounts, restrict the percentage of Stock Exchange loans allowed to the commer- cial banks and forbid the practice of `no purpose
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gamblers to plunge on borrowed money. But the Federal Reserve is not an authoritarian body; it can only use its conventional money weapons; and they may not be sharp enough to stop a runaway boom on Wall Street which is becoming increas- ingly like 1929. I do not think that Samuel Montagu exaggerate when they say that the pos- sibility of an embargo being laid on American gold sales should not be overlooked.
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