COMPETITION FOR SOUTH AFRICAN GOLD

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001600010006-4
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 11
• Document Creation Date: December 22, 2016
• Document Release Date: October 1, 2009
• Sequence Number: 6
• Publication Date: May 1, 1968
• Content Type: IM

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Secret
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
INTERNATIONAL FINANCE SERIES N0.1
Competition for South African Gold
Secret
ER IM 68-56
MAY 1968
COPY NO. 82
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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
XXCLIIOXD TII JM AUTOMATIC
MWNOIIAIIINO AND
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Foreword
This memorandum is the first of a series of
occasional publications on international financial
problems. A related series on gold markets is
planned to be published monthly.
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
May 1968
INTELLIGENCE MEMORANDUM
INTERNATIONAL FINANCE SERIES NO. 1
Competition for South African Gold
Summary
The battle for domination of the new free gold
markets has been joined. Two powerful private
groups, one of which is a combination of Swiss banks
and the second a consortium of international
interests, are actively seeking exclusive control
of the marketing of South African output, which
accounts for about 75 percent of all gold mined in
the Free World. South Africa, in an attempt to
push the price level higher, has refused to market
gold for the past two months. While an immediate
marketing channel is not at issue, South Africa will
not be able to suspend gold sales indefinitely,
since gold pays for about 40 percent of its imports.
South Africa can, however, maintain a gold embargo
for many months if it chooses to do so, at least
through the remainder of 1968.
If the marketing contest were restricted to
these two private groups, the Swiss banking combine
might well emerge victorious. However, the London
bullion dealers may well enter the contest before
South Africa makes a marketing decision. Also,
South Africa probably will avoid making an exclusive
dealing commitment with any single group in order
to preserve its own flexibility.
London bullion dealers represent the strongest
potential rival to the Swiss group in the competition
for control over purchases and resales of South
African gold. Unless reotrained by the Bank of
England, they can be expected to enter the contest
Note: This memorandum was produced soZeZy by CIA.
It was prepared by the Office of Economic Research.
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for new gold once South Africa is ready to resume
sales on a large scale. Paris dealers are not likely
to become a major force in the competition for South
African gold unless the French government exerts
pressure and provides subsidies to support such a
venture. Although rumors abound, there is no firm
information that the French government is so engaged.
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Introduction
1. The structure of international gold markets
has been in flux since 17 March 1968, when the heads
of seven major central banks meeting in Washington
decided to stop supplying gold to private buyers
from their reserves and, at least temporarily, to
cease purchasing privately held jr newly mined gold.
This decision, in effect, established two separate
markets -- one for monetary and another for nonmone-
tary gold transactions. Monetary gold continues to
be traded among central banks at the fixed price of
$35 per ounce, while producers, industrial consumers,
speculators, and hoarders trade in a free market at
prices determined by supply and demand.
2. Since the establishment of the new "two-tier"
system, gold prices in the principal free markets
have been held down by a large "overhang" ($2 billion
to $3 billion) of bullion purchased during the recent
monetary crises. Many speculators who bought heavily
are now not willing to sell at prices yielding only
a modest gain over their $35 per ounce purchase price,
and liquidation has been slow.
3. The existence of the overhang is a temporary
phenomenon, although its duration is uncertain.
How long it will persist depends on three factors:
(1) the expectations of speculators on the extent of
the price rise; (2) the time required for industrial
and artistic demand for gold, as well as purchases
for long-term holdings in hoards, to absorb the
excess supplies; and (3) the rate at which newly
mined gold (and any gold from official reserves)
enters the market.
4. In these circumstances, the major suppliers
have been reluctant to enter the market. The USSR,
the world's second largest producer, has not been
selling gold because it has currently no need for
larger supplies of foreign currencies and prefers to
build up its gold reserves. South Africa, whose
annual output constitutes more than 75 percent of
the Free World's gold production, also has ceased
exporting gold. The South African Finance Minister
announced on 9 April 1968 that South Africa would
market no gold for the time being. Although gold
normally pays for about 40 percent of its imports,
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South Africa can hold its gold production off the
market for months without detrimental effects on its
economy. Trade deficits have been covered by a large
inflow of private foreign capital, and foreign bank
credit is readily available if needed. Nevertheless,
South Africa may choose to resume gold sales at any
time. Anticipating a resumption of South African
gold sales, two private groups -- one Swiss, the
other international -- have begun an intense competi-
tive scramble for major customers and for exclusive
rights to sell South African gold.
The Swiss Group
5. Three of Switzerland's largest commercial
banks -- the Swiss Bank Corporation, the Swiss Credit
Bank, and the Union Bank of Switzerland. -- have
formed a group to manage the Zurich gold market and
to acquire exclusive rights to sell South African
gold. Even before the London gold market suspended
operations for a two-week period beginning 15 March,
the Union Bank of Switzerland, acting for the group,
sent a representative to South Africa to negotiate
arrangements for gold purchases and shipments. A
bid was submitted to the Reserve Bank of South Africa
The International Consortium
6. On 19 March, a competitor entered the
picture -- a consortium consisting of two French
commercial banks, a major US trader and industrial
consumer of gold, Union Acceptances, Ltd., of South
Africa, a small Swiss financial house, a London
bullion dealer, and several individuals. None were
members of the Swiss group, except Union Acceptances,
which appears to have a foot in both camps at the
same time.
7. The consortium expressed its goal unambiguously:
to establish itself as the sole outlet for South African
gold. On the selling side, the consortium hopes to
achieve control of the market for industrial and artis-
tic uses and then to supply speculative and hoarding
demand from its surplus gold holdings.
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8. A major effort was made to persuade the
South Africans that the consortium controlled all
of the industrial outlets in Europe and, therefore,
that it was uniquely suited to market all South
African gold. The consortium did not possess the
degree of control it claimed, but it was making a
systematic and energetic effort to gain such mastery.
It laid plans to enter every available market with
a price quotation $0.25 per ounce below that of the
lowest bidding competitor. The consortium probably
was prepared to meet thase commitments either with
gold on hand or with gold newly purchased at a higher
price, the prospect of market control comransating
for temporary losses that might be involved.
9. At this point, the South Africans expressed
their displeasure with the absence of other bidders.
The consortium thereupon decided to have various
members enter the bidding individually to create an
aura of competition. Whether or not any members
actually entered individual bids is not known. In
any event no sale is known to have resulted.
Further Competitive Moves
10. During late March and early April, both
groups engaged in active competition for the South
African gold account. The Swiss group issued public
statements claiming that the volume of gold transac-
tions on the Zurich market was large and confidently
predicting that Zurich would replace London as the
principal international gold market. It continued
to press this argument, without success, in a high-
level personal visit to the head of the Reserve Bank
of South Africa. On 25 March, its representative
was informed that no South African decision had yet
been made. The continued failure of the Swiss group
apparently was discovered quickly by the consortium.
Indeed most moves of the Swiss group were made known
to the consortium, probably by Union Acceptances.
During the final week of March, the consortium formal-
ly presented its marketing proposals to officials of
the Chamber of Mines, a private association that con-
tols production and refining of gold in South Africa.
11. South Africa continued to delay a decision.
Then on 27 March, the Reserve Bank of South Africa
requested both the Swiss group and the consortium to
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place formal bids for about three tons of gold. on
the same day, the Prime Minister announced that
South Africa would sell gold on the free market, but
he did not say when. Since no gold transactions are
known to have resulted, the request for formal bids
probably was a tentative probe by South African
ai:thorities to test the price expectations of major
free market dealers. Indeed, on 9 April the South
African Prime Minister stated that his government
would continue to withhold gold and would remain
open-minded about future marketing arrangements.
Then on 7 May a representative of the Swiss banks
reported from Johannesburg that a meeting with a high
official of the Reserve Bank of South Africa would
result in a decision (probably on gold :ales through
Zurich) the following day but that Zurich was to
expect nothing firm until the end of May.
London and Paris
12. The financial press has created the impres-
sion that the contest for control of free gold mar-
kets in Western Europe is a three-way affair among
dealers in Zurich, London, and Paris. The major
gold dealers in each of these three cities are
organized to conduct retail transactions in their
own markets. But so far, only those in Zurich also
have actively sought control of South African sales,
which is essential to secure future control of the
wholesale function for all markets in Western Europe.
13. For almost seven years -- May 1961 through
mid-March 1968 -- the Bank of England, acting as
agent for Gold Pool members and operating through
London gold dealers, controlled the wholesale func-
tion.. During that period, the main suppliers were
the US Treasury and the South African Reserve Bank.
London lost its control of wholesaling in mid-March
1968, when Gold Pool operations were abandoned in
favor of the two-tier market. The JS Treasury no
longer supplies gold to the free market. The Bank
of England, in support of the new system, has relin-
quished its role of agent for South African sales,
at least for the time being. So far, the London
dealers on their own have not actively sought to
regain control of South African sales.
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14. Paris dealers on 9 May announced that, hence-
forth, trading would be conducted throughout the
day rather than be limited to an hour or less as had
been the practice for years. They also announced,
however, that prices would be set at 11:45 A.M. and
3:30 P.M., well after the morning and afternoon
"fixes" in London and after trends are established
in Zurich. This time lag suggests that, at least
for the present, they do not see Paris as the leading
market in Western Europe. Moreover, the principal
dealers in Paris, like those in London, have not
actively sought control of South African sales.
Outlook
15. The struggle between the Swiss group and the
international consortium is likely to continue for
at least as long as South Africa withholds the bulk
of its upplies from the market. The Swiss group's
three principal members are located in the same city
and operate under the same liberal laws. Moreover,
they have numerous active accounts and continuous
market contacts. The international consortium is
not yet a going concern and could not sustain prof-
itable operations on a large scale unless it acquired
substantial quantities of South African gold.
16. Unless they are restrained by the Bank of
England, London bullion dealers can be expected to
enter the contest for new gold once South Africa
indicates a readiness to resume sales on a large
scale. Possessing many advantages, the London
dealers represent the strongest potential rival of
the Swiss group. Their position would be even more
formidable if the Bank of England reinstituted arrange-
ments with the Union Castle Steamship Lines for trans-
porting bullion from Durban to London at exceptionally
low rates. Moreover, because a major London dealer
is a member of the international consortium, a com-
munity of interest could quickly develop, combining
the London dealers' cost advantage and the consor-
tium's access to major industrial users.
17. Paris dealers are not likely to become a
major force in the competition for South African
gold unless the French government exerts pressure
and provides whatever subsidies are needed to support
such an effort. Although rumors abound, there is no
firm information that the French government, acting
with or without the Paris dealers, is so engaged.
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