PROSPECTS FOR RESUMPTION OF SOUTH AFRICAN GOLD SALES

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001600010025-3
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 16
• Document Creation Date: December 22, 2016
• Document Release Date: October 1, 2009
• Sequence Number: 25
• Publication Date: June 1, 1968
• Content Type: IM

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Secret
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
International Finance Series, No. 2
Prospects for Resumption of South African Gold Sales
Secret
ER IM 68-75
June 1968
Copy N?- 86
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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
Encluded Irom oulomolic
downgrading nod
dodanifcaNon
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Foreword
This. memorandum is the second of a series of
occasional publications on international financial
problems.
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
June 1968
Prospects for Resumption
of South African Gold Sales
Summary
There is no firm evidence that South Africa has
yet sold gold since the two-tier market was estab-
lished in mid-March, although it is actively probing
central banks and international monetary institutions,
including the IMF, to find outlets. While South Africa
has the economic capability to maintain its embargo
well into 1969, it will sell gold if it can find out-
lets that it considers attractive.
South Africa would prefer to have the option of
selling on either the official market at $35 an ounce
or the free market, hopefully at a higher price.
This arrangement would permit South Africa to
maximize revenue from gold sales by choosing
the market that yielded the better return. At
the present time the official market comprised of
major central banks probably will not take newly
mined gold, and the free market price is threatened
by the overhang of more than $2 billion bought by
speculators since the sterling devaluation in
November 1967. South Africa's withdrawal from the
market thus appears to be primarily defensive. A
further marked deterioration of the international
monetary system, however, might encourage South Africa
to play for higher stakes, holding its gold off the
market for a considerable period in hopes of a
permanent increase in the official price.
Note: This memorandum was produced soZeZy by CIA.
It was prepared by the Office of Economic Research.
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Normally, South Africa must sell gold in order
to cover deficits in its balance of payments. During
the four years 1964-67, gold sales financed about
43 percent of total imports, and during the same
period accumulated balance-of-payments deficits
amounted to only $21 million. In the first quarter
of 1968, South Africa's balance of payments improved
appreciably in spite of only minimal gold sales
because of an improved trade balance and the inflow
of some $280 million in foreign exchange, much of
which was used to purchase shares of gold mining
stock on the South African stock exchange. Con-
sequently, South Africa had a surplus of $196
million in its balance of payments in the first
quarter. This surplus should nearly cover the
expected deficit in the second quarter. After
mid-year, ho:vever, deficits of about $200 million
per quarter will necessitate either borrowing or
the sale of gold.
If South Africa decided to borrow money abroad
to meet current needs, it could probably refrain
from selling gold through the remainder of the
year and beyond. This would necessitate borrowing
from $250 million to $650 million abroad by the end
of the year. In view of its mounting gold rescrves,
which totaled an estimated $900 million by the end
of May and would in the absence of sales amount to
some $1.55 billion by the end of the year, South
Africa should have little difficulty obtaining
loan-, of this size.
- 2 -
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Background
1. South Africa's current production of more
than $1 billion of gold annually amounts to about
65 percent of the world total and to about 75 per-
cent of the supply of new gold outside the USSR.
South African gold sales of almost $9 billion
during the last ten years have been equivalent in
value to 64 percent of South Africa's merchandise
exports during the period and to 47 percent of the
country's merchandise imports f.o.b. (see Table 2).
2. South Africa normally exports almost all
its gold production; during 1967, exports were
about $90 million monthly. From 1958 through 1965,
gold sales kept pace with the 74-percent growth
of manufacturing output, rising from $616 million
to $1,081 million. In the last two years, however,
gold production has stabilized at slightly over $1
billion a year and is expected to begin to decline
in the early 1970's, unless South Africa can sell its
gold for more than $35 an ounce.
3. South Africa has normally maintained a sur-
plus on current account by means of gold sales. In
the last four years, however, imports rose rapidly,
resulting in a deficit on merchandise trade alone
amounting to an average of $836 million a year.
Service payments, which in South African accounting
include c.i.f. on imports, remained well ahead of
service receipts, adding $487 million a year to the
current account deficit. Gold sales, averaging $1
billion a year, financed part of the deficit, but
in spite of earnings of $4 billion from gold, the
deficit on current account totaled $719 million during
1964-67, ranging from as much as $412 million in 1965
to only $18 million in 1966. Surpluses on capital
account resulting from an inflow of capital into the
private sector began in 1965 and in the last three
years have largely offset deficits on current account.
During the period 1964-67, the surplus on capital
account totaled $639 million, leaving a Diet deficit
in the balance of payments for the period of only $21
million (see Table 1).*
* A further drawdown of gold and foreign exchange
reserves of almost $20 million occurred as a result
of the devaluation of sterling and certain other
currencies in November 1967.
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Table 1
South Africa: Annual Balance of Payments L/
1964-67
Million US $
Merchandise exports, f.o.
b. 1,516
1,490
1,679
1,859
Gold sales
1,030
1,085
1,075
1,081
Service receipts
301
333
344
461
Merchandise imports, f.o.
b. -2,233
-2,552
-2,349
-2,755
Service payments
-741
-825
-858
-963
Transfers
48
57
91
106
Balance on current account
-78
-412
-18
-211
Capital Movements
Total capital movements
Changes in gold and foreign
exchange reserves
-125
-50
190
-36
a. Because of rounding, components may not add to the totals
shown.
4. By and large, South Africa has been conserva-
tive in its international economic relations,
generally maintaining a favorable balance of payments.
The foreign debt has averaged only $225 million over
the last ten years and was reduced to $129 million
in 1967. South Africa's Reserve Bank's gold holdings
fluctuated from $210 million in 1958 to a low of $176
million at the time of the Sharpesville incident in
1960, when there was an extraordinary outflow of
capital. Gold reserves recovered rapidly, however,
to $624 million by the end of 1963 because of
large surpluses on current account. Reserves
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declined slightly in the following two years but
recovered again in 1966 as the balance of trade
improved and foreign capital was attracted by
investment opportunities. An increase of more
than $400 million in imports in 1967, however,
reduced gold reserves to $578 million at the end
of 1967. Hard currency reserves have fluctuated
around $100 million, standing at $102 million at the
end of 1967 (see Table 5).
Recent Developments
5. South Africa's reaction to the international
monetary crisis, which began with the devaluation of
sterling in November 1967, was first to reduce its
gold sales and then to withdraw from the market com-
pletely. December's sales were less than 75 percent
of normal levels, and in January and February 1968
a total of only $70 million was sold -- less than
one-half the normal rate. Sales, if any, in the
first half of March have not been reported, and no
gold has been sold abroad since mid-March when the
two-tier market was established.
6. South P f.rica has been able to withhold its
gold output from the market without significant
financial strain, principally because of an improve-
ment in the trade balance and heavy capital inflows
in the first quarter of 1968. During the first
quarter of this year, imports declined by 11 percent
from the first quarter of 1967. The decline was a
continuation of a downward trend that began after
mid-1967, following an unusually high level of imports
in the first half of the year that added $286 million
to industrial and commercial inventories. The major
decreases in the second half of 1967 occurred in the
statistical classes "machinery and transport equipment"
and "manufactured goods" reflecting a downturn in
the investment cycle, a reduction of consumer liquidity,
and a decrease in the growth rate of economic activity
in general. Also, in the first quarter of 1968, food
imports declined as the result of a good harvest.
There is no evidence that the decline in imports has
any direct relationship to the international monetary
crisis.
7. Non-gold exports, which rose by almost 11
percent in 1967, continued their upward trend in the
first quarter of 1968, when they were 23 percent
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above the first quarter of the previous year. Most
of the increase was due to improved harvests and
livestock exports. Service receipts were also up
as the result of the increased use of South Africa's
port facilities, since the closure of the Suez
Canal, by ships rounding the Cape of Good Hope.
Service payments have been held down somewhat by
the reduction in commodity imports (see Tables 3
and 4).
8. Although gold sales during the first quarter
of 1968 were nearly $200 million below the normal
level, the deficit on current account totaled only
about $125 million. The deficit on merchandise
trade amounted to about $111 million, and service
payments exceeded service receipts by $108 million.
Gold sales of $70 million in the first two mon'hs
of the year and net transfers of $24 million reduced
the deficit to the $125 million total.
9. South Africa had no difficulty financing the
deficit on current account without resort to selling
gold, because of a massive capital inflow of some
$280 million in the private sector during the
quarter. Much of these funds were used to buy
gold nJ ning shares on the South African stock
exchange, raising the total capital inflow during
the first quarter of 1968 in the private sector to
an estimated $350 million. This was reduced only
slightly by an outflow of $25 million from the
central government and the banking sector, leaving
a net surplus on the capital account of about $320
million. As a result, there was an increase of
about $190 million in foreign exchange reserves.
10. The withholding of all but $70 ,nillion of
gold production from the market in the tirst quarter
added $158 million to gold reserves, raising them
from $578 million at the close of 1967 to $736 mil-
lion at the end of March. By the end of May, gold
reserves probably exceeded $900 million.
11. Thus the South African economy has been
little affected by the gold crisis. The decline in
imports has been due to other causes and would have
occurred in any event. Gold production has con-
tinued as usual so that incomes generated in gold
mining have not changed, and all gold has been
purchased by the South African Reserve Bank in the
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normal way. The absence of gold exports has not
been inflationary, because there was no difficulty
financing imports, and gold production has gone
into the government account and has not been avail-
able for credit expansion. The main monetary prob-
lem for South Africa during the gold crisis has
been the influx of foreign capital to buy gold
shares. This influx does add to bank reserves and
is therefore potentially inflationary. Since South
Africa's control of inflationary forces in the
economy in recent years has been quite effective,
the effects of this inflow appear to be manageable.
Prospects
12. South Africa's gold policy is noL_ yet clear.
It has made efforts to market its gold to central
banks and international monetary institutions, such
as the International Monetary Fund, but has remained
largely unresponsive to efforts of the free market.
The few inquiries South Africa has made as to possi-
bilities for free market sales have been very discreet
and have involved small amounts that would not dis-
rupt the market.
13. South Africa appears able to hold its gold
off the world market for months without having to
make any significant adjustment in its domestic
economy. Its foreign currency reserves were
adequate to cover or nearly cover deficits through
June. From now on, deficits will have to be
covered by borrowing unless there continues to be
an unusually large capital inflow. Depending on
the capital inflow and on when a new cyclical up-
swing in investment resumes, borrowing needs could
amount to as little as $200 million to $300 million
or as much as $600 million to $700 million during
the second half of 1968. There seems to be no
question as to South Africa's ability to obtain
this much credit, or more. South Africa is con-
sidered an excellent credit risk, and if it does
not sell gold, its gold reserves would exceed one
and one-half billion dollars at the end of 1968.
South African Policy Options
14. The fact that South Africa can refrain from
selling gold does not mean that it will do so. The
decision will depend on its assessment of (1) pros-
pects for the international monetary system, (2) the
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possibilities of an increase in the official price
of gold, and (3) the supply and demand for gold in
the free market. At the present time, South Africa
fears that its resumption of sales might prompt
speculators who bought more than $2 billion in gold
following devaluation of sterling in November 1967
to dump their holdings on the market. Such an in-
flux of large quantities of gold could drive the
free market price below $35 an ounce.
15. South Africa would prefer to have the option
of selling on either the official market at $35 an
ounce or on the free market, hopefully at a higher
price. This arrangement would permit South Africa
to maximize revenue from gold sales by choosing
the market that yielded the better return. But if
the official market continues to refuse to buy
newly mined gold and the dollar remains strong,
South Africa will eventually enter the free market.
As time passes, industry and hoarders will absorb
the overhang held by short-term speculators and the
market will strengthen. In addition, small amounts
might be bought by the Bank for International
Settlement.
16. If, however, the international monetary
crisis intensifies (for example, because of a new
sterling crisis or the failure of US measures to
reduce the dollar drain), South Africa may judge
that it can force an increase in the official price
of gold by refraining from any sales at all. If
it should decide on this course, it probably could
continue to withhold gold well into 1969 if neces-
sary by borrowing abroad with relatively minor
interest costs.
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South Africa: Annual Balance of Payments J
1958-67
Million US $
1958 1959 1960 1961 1962 1963 1964 1965 1966 1967
Current Account
Merchandise exports, f.o.b.
1,084
1,228
1,231
1,303
1,333
1,424
1,516
1,490
1,679
1,859
Gold tales
616
706
742
806
885
963
1,030
1,085
1,075
1,081
Service receipts
216
223
235
231
255
260
301
333
344
461
Cl)
Merchandise imports, f.o.b.
-1,581
-1,393
-1,578
-1,431
-1,467
-1,823
-2,233
-2,552
-2,349
-2,755 Cn
Service payments
-584
-563
-594
-626
-601
-654
-741
-825
-858
-963 n
M `D
Total goods and services
(net receipts +)
-249
200
36
284
405
3.71
-126
-469
-109
-318 y
Transfers (net receipts +)
nce on current account
l
B
35
-214
32
?232
-7
2
9
--
284
27
431
36
=
48
-78
57
-412
91
-16
106
-211
a
a
Capital Movements
.
1
Private sector
115
-76
-231
-116
-90
-101,
-57
227
224
277
Central government and
banking sector
111
-45
17
-18
-78
18
11
134
-15
-102
Total capital movements
(net inflow +)
225
-120
-2).4
-168
-46
X61
220
175
Change in gold and foreign
exchange reserves
11
112
-185
150
263
122
-125
-5
L9_0
.136
a. Because of rounding, components may not add to the totals shown.
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South Africa: Quarterly Balance of Payments
1966-67
Million US $
1966 1967
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Total Quarter Quarter Quarter Quarter Total
Merchandise exports, f.o.b.
Gold sales
Service receipts
Merchandise imports, f.o.b.
Service payments
379
274
78
-563
-185
421
265
83
-533
-203
480
270
81
-610
-214
398
266
102
-643
-256
1,679
1,075
344
-2,349
-858
437
269
95
-728
-220
449
276
108
-735
-258
501
272
113
-689
-234
472
265
144
-603
-252
1,859
1,081
461
-2,755
-963
Total goods and services
Cn
(net receipts +)
-15
32
7
-133
-109
-147
-160
-36
25
--318
Transfers (net receipts +)
22
20
24
25
91
28
25
29
24
106 ttj
Balance on current account
2
-108
-18
-119
34
-211
Private sector
18
71
22
112
224
25
125
62
66
277
Central government and
banking sector
15
11
-39
-3
-15
-11
-50
-15
-25
-102
Total capital movements
(net inflow +)
34
83
-17
1~0
209
14
74
46
41
12
Changes in gold and foreign
exchange reserves
134
14
1
190
-105
-60
70
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South Africa: Estimated Quarterly Balance of Payments
1968
First Second
t
r
Third
quarter
Fourth
Quarter
Total
e
Quarter quar
_
Low
High /
b
/
Low /
`I
High ,/
J
R
Low _~
Ran
e `J
High /
Range -d/
Low
Range `'/
High ,~
Range -d/
Low
Range
High
Range
Range J
Range
-
Range
ange
g
C:;~:rent Account
Merchandise exports, f.o.b.
539
539
539
465
539
465
539
465
2,156
70
1,934
70
Gold sales
70
70
44
76
460
Service receipts
144
115
144
115
144
115
1
115
68
5
600
-2
717
-2
Merchandise imports, f.o.b.
-650
-650
-650
-689
-650
-689
-650
9
-
241
,
008
-1
,
-964
Service payments
-252
-241
-252
-241
-252
-241
-252
-
,
Total goods and services
1
50
-
-806
217
-1
rfj
c/D
(net receipts +)
-149
-167
-219
-350
-219
-350
9
-2
3
,
Transfers (net receipts +)
24
27
24
27
24
27
24
27
96
1C8
C)
12
-140
-195
-323
-195
-323
-195
-323
-710
-1,109
Balance on current account
5
-
Capital Movements
Private sector
346
349.
66
69
66
69
66
69
544
556
Central government and
-25
-25
-25
-25
-100
-100
banking sector
Total capital movements
1
24
41
44
41
44
41
44
444
456
(net inflow +)
32
.~
Change in gold and foreign
4
2
-154
-279
-154
--j
-266
-653
e reserves
h
196
184
-15
-
79
ang
exc
a. Merchandise exports, gold sales, and merchandise imports are reported for the first quarter. Capital movements in the
private sector include the reported $280 million inflow of foreign capital used primarily to buy gold mining stock shares; to
this is added $66 million, the inflow in the last quarter of 1967 believed to be representative of the normal inflow.
Figures for the fourth quarter of 1967 are usod for all other items in the balance of payments.
b. Estimates in the second column include all reported figures (see a, above), and the 1967 average for those items not
reported.
c. Merchandise exports and merchandise imports are estimated at the same level in the last three quarters as in the first
quarter of 1968. All other items are estimated at the level of the fourth quarter of 1967-
d. All items are estimated at the quarterly average in 1967.
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South Africa: Gold and Foreign Exchange Reserves a/
1958 Through 17 May 1968 _
Million US $
End of Period Total Gold Reserves Foreign Exchange Reserves
1958
314
210
104
1959
426
237
189
1960
239
176
63
1961
388
297
91
1962
603
494
109
1963
721
624
97
1964
659
570
90
1965
536
421
115
1966
729
631
98
1967
680
578
102
January 1968
725
620
106
February 1968
775
686
90
March 1968
861
736
126
12 April 1968
896
785
111
17 May 1968
994
902
92
a. Data are for the Reseroe Bank only, and there fore changes
in gold and foreign exchange reserves differ from those in
Table 1. Because of rounding, components may not add to the
totals shown.
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