THE WORLD GOLD MARKET

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001600010048-8
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 24
• Document Creation Date: December 22, 2016
• Document Release Date: October 1, 2009
• Sequence Number: 48
• Publication Date: August 1, 1968
• Content Type: IM

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25X1
Secret
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
INTERNATIONAL FINANCE SERIES, NO. 5
The World Gold Market
Secret
ER IM 68-99
AUGUST 1968
COPY N0. ~,~
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WARNING
This document contains information affecting the national
defense of the United States, within the meaning of Titlc
18, sections 793 and 794, of the US Code, as amended.
Its transmission or re~?elation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
R7CCLUDRD TNOM AUTOMATIC
SIX: LAB 1TICAT ON
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
August 1968
The World Gold Market
Summary
During July 1x68, US gold reserves increased
and free market g~~1d prices declined. Among
transactions in the "official" tier of the market,
French sales of gold to the United States continued,
as a result of the severe exchange losses France
had suffered since the onset of its domestic crisis
in ~Iay . France sold the United States $ 75 million
in gold during July and plans another sale of $75
million in August. When added tc sales of $220
million in June (part of a total of $400 million
sold to major Western central banks), these sales
will bring the total current flow of gold from Franr,.e
to the United States to $370 million. Meanwhile,
many smaller countries, especially those trying to
reduce their sterling holdings, continuE to pur-
chase US gold. So far, these small purchases have
been more than offset by French sales, but during
August they will total $125 million more than
French sales.
The only other significant official transaction
was another purchase of gold ($34 million) by
Portugal direct from South Africa. This is part
of a series of transactions that will reach a total
%?f about $112 million by the end of August.
Another transaction, of still unknown amount, is
planned for September.
In the private tier of the world gold market,
the main development was a sharp price decline in
mid-July from more than $40 an ounce to about $38
an ounce. This decline reflected increasing
Note; This memorandum was produced soZeZ~ by CIA.
It was prepared by the Office of Economic Research.
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~.Cl~.tt.C, 1
confidence in the international monetary system,
stimulated not only by the announcement of new
arrangements to support sterling but also by
passage of the US income tax surcharge bill in
Congress. Two rumors also played important roles
in bringing down the private market price. The
first, which was without foundation, was that the
USSR would soon sell gold to finance wheat purchases
from Canada. The second was that South Africa was
on the point of reaching agreement with the major
Western central banks on a scheme to sell South
African gold in both the official and private tiers
of the market, wi~h arrangements to place a "floor"
of $35 per ounce under the price in the private
tier (the official price is guaranteed at $35 an
ounce by the US Department of the Treasury). Dis-
cussions of possible arrangements of this nature
are under way, but no agreement has been reached.
As the free market gold price fell toward $38
per ounce, Minister of Finan.:e Diederichs announced
in Johannesburg that South Africa had sold gold to
both official and private buyers in May and June
and thEreby had received sufficient foreign exchange
to permit South Africa to refrain from further sales
for "a considerable time to come." By subtracting
known official sales, South Africa's sales to frFe
market dealers -- almort certainly the Swiss -- can
be es~i.mated at abcat $35 million. It is not known
whether the gold involved actually was p1ac;Pd on
the market by dealers. If it was, marketing agents
parceled it out in small amounts to avoid price
disruptions and carefully refrained from any public
announcement of its origin. Both the small total
involved and marketing precautions cast doubt
on Diederichs' assertion that South Africa's "sub-
stantial' sales were a test of the market's ability
to absorb South African sales without marked price
declines. In any case, the South African statement
on past gold sales and the suspension of future
s41es had very little effect on gold market prices,
and they remain well below the levels of late June
and early July .
The ruling prices in the free gold market are
those prevailing in London and Zurich, the two
principal marketing centers. In Paris, where the
market has beers affected by reduced confidence in
the franc and by exchange controls that cut off
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access to freely imported gold from London and
Zurich, prices have remained about $3 an ounce
higher. In Frankfurt, the center of the West
German gold market, prices have followed trends
in London and Zur9.ch. Both Paris and Frankfurt
are candidates for status as international gold
markets of importance, but neither has reached that
level as yet. T.he domestic crisis has dealt a
serious blow to French hopes in this regard, and
the Paris market remains technically at a disadvan-
tage in terms of experience, storage facilities,
and access to large supplies. The Frankfurt market:
has been substan~ially reorganized and is actively
seeking an international gold business. As an
international market, Frankfurt potentially is in
a stronger position than Paris.
Communist activity in Western gold markets
remains small. During the first few months of
1968, Communist China was a relatively heavy pur-
chaser of gold, as it shifte d its foreign assets
out of weak currencies and inter both gold end
strong currencies like the Deutsche Mark. The
USSR has not sold any gold iii more than a year,
nor have East European countries been especially
active.
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Th.e Official Market for Gold
1. During the first three weeks of July 1968
she United States or. balance acquired $39 million in
gold. Six countrie^ purchased a total of $36 mil-
lion (see Table 1), but this was more than offset
by a French sale of $75 million to the United
States. The US gold stock rose by about $300 mil-
lion to $10.7 billion on 19 July. The Bank o
France is expected to sell $75 million more to the
United States in the near future. Fresently expect-
ed purchases of gold from the United States by
smaller countries, however, exceed the anticipated
French sale by $125 million.
2. During July, there were only three known
gold transactions by central banks that could be
interpreted as possible violations of the intent
of the Washington agreement. One case involved
a purchase of South African gold and the other two
involved central bank c?ealings in the private gold
market. All three transactions appeax to be similar
to those reported in the last World Gold Market
report.
Case One
3. The South African Reserve Bank is under-
stood to have offered to sell tY~e Bank of Portugal
(the Portuguese central bank) almost $79 million in
gold during August. The Reserve Bank sold the
Hank of Portugal more than $34 million in July.
Both the July sale and the offer to sell during
August are at the official price of $35 per ounce
(plus a small shipping charge). Another sale, the
amount ~f which is not known, may be scheduled fir
September..
4. In addition the Portuguese central bank,
which already has purchased $5 million in gold from
the United States, intends eventually to purchase
$95 million more, also from the United States.
Portuguese central bank officials have indicated
that they intend to convert about 70 percent cf
Portugal's foreign reserves into gold. This
relationship was achieved in 1960 but the gold
share had fallen to 56 percent by the end of 1967.
If Portugal completes the planned purchases from
South Africa (for a total of $112 million) and
purchases a total of ab gut $l0U million from the
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Actual and Planned Transactions in Gold with the United States
July-December 1968
Purchases from
the United States
Gold Sales to
the United States
Flann~d Purchases
-- from and Sales to
the United States
(1-19 July)
(1-19 July)
(20 July - End of Year)
Country
Amount
Country
Amount
- Country
Amount
~
Argentina
5.0
France
75.0
Purchases
~
~
~
Ireland
0
4
C~
rn
Kuwait
.
4.8
ina
~
~
~
~
Malta
7.2
Kuwait
48.0
~
~
0
5
Portugal
95.0
~
Portugal
Singapore
.
10.0
Saudi .Arabia
25.0
y
Singapore
10.0
Sales
France
75.0
Total
36.0
75.0
125.0 a/
a. Net purchases.
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United States,: gold holdings would reach an 2sti-
mated $923 million, or about 75 percent of estimate d
foreign reserves.
Case Two
5~ Kuwait purchased 25X1
about 400,000 in gold from the Swiss Bank Corpora- 25X1
tion during tY.e second week in May. Kuwait also 25X1
may hive purchased about 1,000 kilo rams of old
during the third week in July.
Case Three
7. Libyan officials claim that the purpose
of their purchases in priv-.te gold markets is to
maintain orderly conditions in the small local
market for industrial gold. Such transactions
are conducted by a department of the Bank of
Libya entire~y separate from that involved in
monetary policy matters. The Libyans claim that
the free market gold purchases of this department
do not contravene the Washington agreement.
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The Free Market for Gold
Principal Developments in July: South
African Sales
8. During the 1a:~t week in June and the first
two weeks in July, gold prices in London and Zurich
fluctuated in a narrow range around $41 an ounce
on normal daily volumes. (The weekly ranges of
prices for London and Zurich are shown in Table 2.)
Price Range in the London and Zurich Gold Markets
24 June-26 July 196 8
US $ per Fine Ounce
Week
London a~ Zurich b~
24-28
Jun
40.80
to
41.05
40.75
to
41.00
1-5
Jul
40.75
to
41.15
40.62
to
41.1
8-12
Jul
39.10
to
41.15
39.00
to
40.00
15-19
Jul
37.70
to
39.20
38.00
to
39.25
22-26
Jul
38.65
to
39.20
38.50
to
39.38
a. Based on the morning and afternoon fixes.
b . Not, exact Zr~ .^-omparab Ze with London; these data
consist of the Zorvest offer to burl and the highest
offer to seZ~ during the week.
During the third week in July, prices in London and
Zurich fell to a range of $38 to $39 an ounce amid
reports that speculators were selling fairly heavily.
llaily volumes in each market rose to 8 or 9 tons,
well above average. The wave of selling can be
attributed to a combination of factors: (1) there
were rumors that ?~he Sovie ~ Union was going to sell
gold to acquire the necessary currency for an
anticipated wheat purchase from Canada; (2) there
were also rumors that South Africa, the United
States and the major European central banks were
very close to an agreement on central bank pur-
chases of .South African gold; and f,3) confidence
in the interna~ioral monetary system was returning
rapidly .
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9. The rumors concerning Soviet sales were
subsequently proved incorrect. The USSR had a
surplus in its hard currency trans actions last
year. The hard currency balance of payments may be
less favorable this year, but there will probably
be no need to sell gold. The rumor that agreement
had been reached between South Africa and the major
Western cer~}rat banks contained an element of truth;
discussions among central banks have been under way.
But agreemeili: has not been reached and South Africa
has not been approached. This rumor was partly
substantiated on 18 July by an official in the
West German Ministry for Economics who informed
the press that central banks may shortly agree to
provide a floor for the free market price by buying
South African gold at $35 an ounce when the free
market price falls to or below this level.
10. On 18 July, Minister of Finance Diederichs
announced in Johannesburg that during May and June
the South African Reserve Bank had sold gold in
botr. the ofricial and private gold markets. He
also announced that because of these sales South
Africa would not need to sell any additional gold
for "a considerable time to come."
11. Diederichs did not announce the amounts
sold. or the exact timing of the sales. During the
third week in June the South African Reserve Bank
sold $42 million to the central banks of France
and the United Kingdom to redeem an equal amoun t
of its own currency issued as part of previous
French and UK drawings on the International Mone-
tary Fund (IMF) . This sale was public and was
no~ considered a violation of the Washington agree-
ment by the US or European central banks, as South 25X1
Africa acquired only its own currency.
12. It appears likely that the Swiss banks
acquired about $35 million in South African gold.
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o~~n~ t
South Africa reported gold reserves of $946 million
at the end of May 1968. Production of gold during
June is estimated at $98 million which, when added
to the reserve figure for the end of May, would
bring South African gold reserves to $1,044 million.
The figure actually reported for the end of June,
however, was only $9u7 million, indicating a
discrepancy o= $77 million. Of this, $42 million
is known to have been sold to France and the United
Kingdom, as indicate' above, leaving a m~.nimum of
$35 million available for free markeic sales .
13. The sale to the Swiss could have been
accomplished in one of two ways : (1) by outright
sale to one or more of the "Big Three" Swiss banks
or (2) by transfer of gold to the Swiss in settle-
ment of a short-term loan by the Swiss to the South
Africans. Such loans have been discussed actively
in recent monti~.s and have formed a principal element
in the bargaining of the Swiss "Big Three" for
access to newly mined South African gold.
14. Diederichs, in his statement, stressed
that his country's tree market sales had no de-
pressive effect on the free market price of gold.
This stress is misleading for several reasoizs .
3f the Swiss banks did purchase gold from South
Africa, they may not actually have sold it on
the free marker but rather may hac~ added it to
their own stocks . Moreover, if the Swiss did in
fact market gold received from South Africa, their
own policies of supporting and stabilizing the
gold market would have impelled them to do so in
small amounts and without announcing its origin.
For these reasons also, and because South African
sales were in May and/or June, according to
Diederichs, these sales probably are not the cause
of the decline in gold prices during Jule.
:Che Engelhard Group
15. Shortly after Diederichs' announcement,
the Engelhard group expressed to South l~frican
officials their disappointment on being excluded
from the free market trans actions. /The Engelhard
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group and the "Big Three" Swiss banks are the two
leading competitors for South African gold.*) The
Engelhard group reportedly was informed that the
South African Reserve Bank, not the Chamber of
Mines,** had made the decision to sell and that it
had selected foreign banks with whom it had a long-
standing association. Although the identity of the
foreign banks was not revealed, the banks in ques~ion
w~:re almost certainly the three Swiss commercial banks .
Neither the quantity nor the precise timing of sales
was revealed. South African officials also stated
that the decision was based on a need for ;secrecy,
thereby implying that any deal with the Engelhard
group might have been compromised.
16. South African officials also stressed that
the Engelhard group should not be discouraged, as
these particular sales set no precedent. They also
stated that, as soon as South Africa's right to
sell to official sources was established, the
decision to sell gold on the free market would then
re~~ert to the Chamber of Mines, which is favorably
disposed toward the Engelhard group. The Engelhard
group had two reactions to these statements:
(1) the South African government would go to great
lengths to keep the amount of the sale secret ??-
apparently even from the Engelhard group -- and ,( 2 )
the South Africans clearly want to keep their options
with the Engelhard group open.
The Paris Market
17. The traditional participants in the Paris
gold market are numerous French hoarders, specu-
lators, and private firms. Except for a few weeks
*~ The Chamber of Mines is the industrial organi-
zation that controls gold mining in South Africa.
It has been the principal point of contact for the
Engelhard group.
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in March and early April, Paris has not been impor-
tant as an international market for gold. Until
the tt~o-tiez market was established in mid-March,
nearly all of the gold traded in Paris was in the
form of 1-kilogram bars (2.2 pounds) and gold
Napoleons (coinsl. The price of Napoleons has been
about $10 and the average price of a 1-kilogram bar
has ranged from $1,200 to $1,500. Both are popular
with the large number of French citizens who hoard
and speculate in gold on a relatively small scal`.
To a much lesser extent 12.5-kilogram bars (27.6
pounds) also are traded in Paris, but the high cost
per bar -- a minimum of about $14,000 at $35 per
ounce -- makes them less popular with the small
buyers, who dominate the mar'cet. The small turn-
over in 12.5-kilogram bars, which are those most
commonly traded in Zurich ar~d London, both large
international markets, also is indicative of the
domestic nature of the Paris market.
18. The French government mints the coins,
whereas the supply of bullion bars is obtained
from speculators and commercial banks and occa-
sionally from dealers in London and Zurich.
According to the Deputy Governor of the Bank of
France, the bank does not intervene in the bullion
market and enters tre market for Napoleons only
when there is strong pressure on prices. During
the November-March crises, the Dank of France was
accused of intervention in the bullion market
through the intermediary of a Parisian commercial
bank, but there is no firm evidence to support
t1' at allegation.
19. Paris was a major international gold market
daring the last days of the gold crisis in March
and for a few weeks after the mid-March establish-
ment of the two-tier gold market. It was particu-
larly important on Friday, 15 March, when both
London and Zurich were closed. The Bank of France
had i~~itially intended to follow suit and close the
Paris market, but then allowed it to remain open ~
The volume of gold traded that Friday
totaled about $45 million (at $44.36 per ounce),
while $53 million had been traded on the previous
day (f..or prices and volume on the Paris market,
see Table 3). The normal daily volume in Paris
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previously had been between $0.5 million and $1
million.
Price Range in the Paris Gold Market
15 March-26 July 1968
15 Mar
18-22 Mar
25-29 Mar
1-5 Apr
8-12 Apr
15-19 AFr
22-26 Apr
29 Apr-3 May
6-10 May
13-17 May
20-24 May c/
27-31 May
3- 7 Jun
].0 -14 Jun
17-21 Jun
24-28 Jun
1-5 Jul
8-12 Jul
15-19 JL11
22-26 Jul
Volume b/
Price a/ (Million
(US $ per Fine Ounce) US $)
44.36 45.0
37.93 to 40.10 20,2
38.40 to 40.38 11.6
36.95 to 38.06 4.6
37.06 to 38.05 1.5
37.51 to 38.04 1.2
38.08 to 38.54 1.5
38.76 to 39.39 1.6
39.32 to 39.80 2.2
39.57 to 41.48 2,0
42.23 to 42.62 3.6
Closed
Closed
42.77 to 45.40 7,p
52.96 to 44.77 N.A.
43.26 to 44.70 N.A.
43.81 to 45.25 1.3
43.42 to 45.23 1.5
42.10 to 43.77 N.A.
42.28 to 4?.62 N.A.
a. Based on Zozvest and highest prices for the
week.
b. Average for the week, including coins as well
as bullion. Generally 90 percent of the daily
vvlume is bullion.
c. 'rice and volume for 20 May only; the market
closed rest of week because of the strike.
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20. Since the Paris gold dealers (unlike the
Swiss banks, the London gold mercha~:ts, and the
Bank of England) do not normally carry a large
inventory of gold, there is some uncertainty con-
cerning their sources of supply --- particularly
on Friday, 15 Plarch .
several possible suppliers: Swiss commercial banks,
other European banks, the French government, and
the USSR. It seems unli}:e 1y that i:lie French central
bank has sold gold since t:ie published amount cf
official gold reserves remained unchanged for the
first three months of 1968. Rumors of Soviet sales
are unconfirmed. Sales c.n 15 March, at a price
above $44 per ounce, were probably made by European
and Swiss commercial banks as we 11 as by private
speculators, who were taking a profit on gold
previously purchased in London at $35 per ounce.
The buyers on 14 and 15 Plarch were about equally
divided between European individuals anc~ firms,
including government-owned Fre. ,h companies, of
which Renault re ortedl was onc.
21. Pressure on the Paris market eased when
the Zurich market reopened on Monday, 18 March.
The Paris price fell to about $40.00 an ounce on
a volume of about $31 million. By the end of the
week, both prices and volume had `allen substan-
tially, and by Friday, 22 March, the price was down
to about $39.00 an ounce. From 25 through 28 March,
prices and volume ro:~e again. On P?7onday,
25 March, the price of gold closed above $40.00
an ounce on a daily volume of $15 million. By
Friday, 29 P~4arch, the price subsided to $38.40 an
ounce on volume of $7.1 million.
22. After the London gold market reopened on
1 April the volume on the Paris market in the
ensuing week declined further to about $5 million
per day. The daily volume during ttie remaining
three weeks of April .fluctuated between $1 million
and $2 million. Prices in Paris during most of
April moved parallel to those in London. The brief
eminence of the Paris market ,.tided by 5 April , as
most of the big international buyers abandone3 Paris
for London and Zurich.
23. The next surge of activity on the Paris
market began with the advent of civil disorde r
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during the third weelc in May . The marlcet functioned
normally on 20 May with prices above $42 per ounce
(in line with prevailing prices in London and
Zurich). On 21 May, opening prices were about
$42.60 per ounce, still in line with London and
Zurich. When the dis~~rder in France grew worse,
however, the Paris market was closed. One report
stated that it was necessary on 21 May for the
French police to block tY~e entrance to the exchange
to keep it from being overrun.
24. Within a week a black market for the 1-
kilogram gold bars and "apoleon coins began
operating. Rough estimates place the daily volume
on the black market between $500 , 000 an c', $750 , 000
with prices at $42.00 per ounce and above. Again
the domestic nature of the Paris market was demon-
strated. Only 1-kilogram bars and Napoleon coins
were traded in the black market; there were no
reports of trading in 12 .5-kilogram bars .
25. The regular market reopened, on 10 June,
and prices remained above $43 per ounce through
the end of June. During this same period, prices
in London and Zurich fluctuated around $41 per
ounce . The higher prices on the Paris market
reflected not only a continued lack of confidence
in the fran c but also the effect of emergency
French exchange controls which prevented legal
importation of gold from the principal markets in
London and Z urich. By the first week in July,
volume subsided to the previous normal daily
average of $ 1 million to $2 million, but prices
remained in the comparatively high range of $44
to $45 an ounce.
26. Paris, along with Zurich and London, has
been publicly discussed as a possible marketing
center for South Africar: gold when the South
Africans fin ally decide to sell gold regularly
on the free market.* The Paris market, however,
must first acquire some standing as an interna-
tional gold market. A first small step in that
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direction, taken on the authorization of the french
government, came on 9 f~Iay with the announcement
::h at twice daily price fixings for the 12.5-kilogram
;gar (one of the basic units in international gold
trade) would be made. The fixings, one at 11:45 a.m.
and the other at 3:30 p.m., are conducted Ay repre-
sentatives of six of France's largest banks:, Banque
Nationale de Paris, Credit Lyonnais, Societe
Generale , Banque d~ 1' Indochine , 1?anquP de Paris
et des Pays Bas , and Compagnie Parisie~ .e de
Reescompte . The first three are goverr~aent banks
anc ~he other three are privately owned. This
arrangement creates a ne4~ market that will be
oriented mainly toward international gold dealing.
It will supplement and partly overlap the tradi-
tional, essentially domestic, market, whose hallmark
has been a brief session of trading on the Paris
Bourse between 12:30 and 1:15 daily.
27. The twice daily fixing of the price of the
12.5-kilogram bar is, however, or~1y a token effort
at establishing Paris as an international gold
market. Much more important ef.torts will be
necessary to trar~~form Paris into something more
than a domestic market. Paris must attract new
and large i.nte?;:national customers, and its dealers
must acquire experience as international gold
dealF~rs . They must acquire storage and refining
capacity, carry larger inventories of gold, and
offer a.n attractive marketing package to major
suppliers -- principally South Africa. The Zurich
gold market fills all of these conditions and,
with the exception ~f the last requirement, so does
tie London market. The Paris market does not
adequately meet any of these requirements. More-
over, the recent domestic disorder in France will
make the Paris market look even less attractive.
28. Nevertheless, Paris dealers may eventually
market a small share of South African gold. Two
of th.e six banks involved in the daily price
fixes --- }3anque de 1'Indochine and possibly Credit
Lyonnais - - also are members of a group headed by
Engelhard Industries, a major US industrial user
and processor of gold, which is attempting to
persuade South Africa to grant it the exclusive
right to market South African gold.* If the
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Engelhard group is successful, some of the gold
acquired eventually may flea through the Paris
market. At presc-nt, however, this appears to b~~
the only way the Paris market can be linked to u
major supplier. Without a major supplier and with-
out numerous large customers there is little need
for storage facilities, refining capacity, oL a
large inventory of gold, and little prospect for
development of an important ir:~ernational gold
market in Paris.
The Frankfurt Market
29. Until an officially endorsed and centrally
regulated gold market was es~tablis'zed in Frankfurt
in mid-June, gold was sold throughout Germany at
various regional prices set by she German refining
firm of DEGUSSA* and several German commercial
b