INTERNATIONAL FINANCE SERIES NO. 6 THE WORLD GOLD MARKET

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001600010065-9
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 16
• Document Creation Date: December 22, 2016
• Document Release Date: October 1, 2009
• Sequence Number: 65
• Publication Date: September 1, 1968
• Content Type: IM

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Secret
tA,
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
International Finance Series No. 6
The World Gold Market
Secret
ER IM 68-115
September 1968
Copy No.
.1 0 7
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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
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
September 1968
INTELLIGENCE MEMORANDUM
The World Gold Market
Summary
During August 1968 the United States bought more
gold than it sold, price fluctuations in gold markets
were narrow, and South Africa established a mechanism
to continue selling gold clandestinely on the free
market.
In August the United States acquired, on balance,
$5 million in gold. Nineteen countries purchased
a total of $84.8 million, but sales to the United
States totalled $89.8 million. Algeria was the prin-
cipal buyer ($49.9 million) and France the principal
seller ($80 million). Many small countries continued
to shift their reserves from sterling and dollars into
gold, and purchases from the United States by small
nations that are planned for the remainder of 1968
were $124.3 million as of the end of August.
The outstanding development in free gold markets
during August was the conclusion of an arrangement
whereby South Africa can continue
gold sales. A consortium of European commercial an_s,
headed by the Swiss "Big Three" (Union Bank of Switzer-
land, the Swiss Credit Bank, and the Swiss Bank Corpo-
ration) have arranged a credit line of $140 million,
with drawings to be repaid by South African gold ship-
ments to Europe. Deliveries of gold under this agree-
ment already have begun, with three air shipments of
8.5 tons each recorded in August and two shipments
of 11.4 tons each scheduled for September. Thus
total shipments delivered and scheduled through
September aggregate 48.3 tons.
Earlier issues in this series have featured
background sketches of major world gold markets.
This issue focuses on the organization and operation
Note: This memorandum was produced solely by CIA.
It was prepared by the Office of Economic Research.
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of the Beirut market. Unlike the main European
gold markets (London, Zurich, Paris, and Frankfurt),
the Beirut market owes its position of importance
to smuggling. Lebanon permits gold to be imported
legally and offers excellent banking and commercial
facilities. Beirut has become one of the world's
principal centers for gold smuggling and the most
important in the Middle East.
Most of the gold for the Beirut market is im-
ported legally from London and Zurich (imports re-
cently have run from about 10 to 15 tons per month)
by three commercial banks -- Societe Bancaire du
Liban, Banque Credit National, and Banque Sabbag.
These banks function as agents for a variety of
commodity and foreign exchange brokers and export-
import houses, which in turn operate as intermedi-
aries of the smuggling trade. Unknown, but probably
smaller, quantities of :gold are also imported ille-
gally outside banking channels. The major clandes-
tine customers of the Beirut dealers are Israelis,
Turks, and Persian Gulf sheiks.
There is no evidence that gold purchased offi-
cially from the United States by the Lebanese cen-
tral bank is in any way connected with the free
gold market in Beirut. Lebanese authorities have
purchased about $95 million in gold from the United
States in 1968, as part of an avowed policy of main-
taining an 80 to 85 percent gold cover for Lebanese
currency. The central bank appears to adhere care-
fully to the intent of the Washington Agreement
which established the two-tier gold market system.
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The Official Market for Gold
1. During August 1968 the United States
acquired, on balance, $5 million in gold. Nineteen
countries purchased a total of $84.8 million, but
this was more than offset by French and Philippine
sales to the United States of $80 million and $0.8
million, respectively (see Table 1). Algeria led
the list of buyers, taking $49.9 million. Much of
this amount probably represented an unloading of
French francs from Algerian reserves in a period
when the weakness of the franc on the exchanges
made it unattractive as a reserve currency. The
Algerians clearly had no great confidence in dollars
either, preferring to shift all the wr.y to gold.
The August transaction brought Algerians total
purchases of gold from the United States in the
past 12 months to $200 million. As in every month
since crisis conditions abated in mid-March, the
other buyers of US gold were small countries pur-
suing a deliberate policy of shifting their reserves
from sterling and dollars into gold. Kuwait and
Singapore, for example, purchased $15.2 million
and $8.0 million, respectively. As of the end of
August, small countries were known to have planned
additional purchases of gold from the United States
totaling $124.3 million -luring the remainder of
1968.
2. Only one official gold transaction in August
could be interpreted as a violation of the intent
of the Washington Agreement. Under an agreement
concluded in June 1968, the Bank of Portugal con-
tracted to buy 100 tons of gold from South Africa
at $35 per ounce ($112.5 million) plus a small
shipping charge. Thirty tons were delivered in
July, and another 40 tons were shipped early in
August. The final 30 tons were to be shipped on
21 August, but for unknown reasons the shipment
was split and only 15 tons were actually delivered
on that date. The remaining 15 tons will be sent
in September.
3. Among the principal financial powers, the
key question of possible official purchases of
South African gold remains unresolved. South Africa
now makes fairly regular sales of gold to the free
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Actual and Planned Transactions
in Gold with the United States
August-December 1968
Million US $
Planned Purchases
Purchases
from and Sales
to the US
from the US
Sales to the US
(1 Sep-
(1-31 August)
(1-31 August)
End of Year)
Country
Amount
Country
Amount
Country
Amount
Algeria
49.9
France
80.0
Afghan-
5.1
Argen-
5.0
Philip-
9.8
istan
tina
pines
Kuwait
23.0
Chile
0.9
Muscat
1.2
Indo?
nesia
0.3
and
Oman
Portu-
95.0
Ireland
Kuwait
3.0
15.2
gal
.1.
Sings-
8.0
pore
Sudan
0.3
Yugo-
1.0
slavia
Other
1.2
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market -- a fact of which most governments other
than the United States Government probably are
unaware. An objective of US policy has been to
induce the South Africans to follow precisely such
a course in the hope that free market gold prices
will decline. There remains, however, a strong
feeling among European central bankers and financial
officials that South Africa's wish to sell gold to
official buyers ought to r-- accommodated, at least
in part, possibly through purchases by the Interna-
tional Monetary Fund (IMF). 25X1
the questions whether to resume official 25X1
purchases of South African gold, by what means, and
at what price, may be forced to issue during the
forthcoming IMF/IBRD annual meetings in Washington.
European officials are adamantly opposed to setting
a "floor" price below $35 per ounce, reasoning
that a price under $35 would amount to a de facto
undervaluation of their own gold reserves.
4. In the event that these questions do come
to the forefront during the IMF/IBRD meetings, it
is a foregone conclusion that the United States
could marshal the necessary votes to block authori-
zation of IMF purchases of gold from South Africa.
Such an action, however, would be highly unpopular
with the United States' monetary allies in Western
Europe. Many leading financial policymakers on the
continent currently feel that such action would risk
a serious split among the monetary authorities of
the major Western countries. Such a split might
induce other Western central banks to purchase gold
directly from South Africa and could jeopardize
prompt implementation of the SDR (special. drawing
rights) scheme.
The Free Market for Gcld
5. During most of August, gold prices in London
and Zurich fluctuated around $39 per ounce on normal
daily volumes. On 21 August, increased demand re-
lated to the Soviet invasion of Czechoslovakia
pushed the London gold price to its highest level
since 9 July. However, prices in Zurich remained
* New information and data on these sales are pre-
sented and discussed below in the section on "The
Free Market for Gold."
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slightly below those in London, largely because
the bank group operating the Zurich market made a
determined effort -- using its control of market
supplies -- to keep the price from rising too quickly.
As the crisis subsided, prices and volumes fell
slightly. But an increase in industrial demand for
gold in a generally thin market kept prices above
levels set earlier i.n the month. (Weekly ranges of
gold prices in London and Zurich ai:e shown in Table 2.)
Price Range
in the-London and Zurich Gold Markets
29 July-30 August 1968
US $ per Fine Ounce
Week Lo
ndon a/
Zuri :h b/
29 Jul-2 Aug 38.80
to 39.30
38.62 to 39.12
5-9 Aug 38.35
to 39.00
38.50 to 39.00
12-16 Aug 38.55
to 39.30
38.50 to 39.25
19-23 Aug 39.10
to 40.30
39.00 to 40.00
26-30 Aug 39.40
to 39.85
39.37 to 40.00
a. Based on the morning and afternoon f'.xes.
b. Not exactly comparable with London; these data
consist of the lowest offer to buy and the highest
offer to sell during the week.
6. The outstanding development in the free
markets in August was the conclusion of an arrange-
ment whereby South Africa over the next twelve
months can continue sales of gold
to the free market.* Undei the leadership of the
Swiss bank group, several European banks will
together provide South Africa with credits equiva-
lent to at least $140 million, at an interest rate
of slightly more than 6 percent, with a small
* Initial sales by South Africa occurred, according
to an official South African announcement in July,
during May and June.
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commitment fee being charged for unused portions
of the credit line. Repayments are linked to Scith
African shipments of gold to Switzerland. Drawi.,igs
against the South African line most likely will be
liquidated with the proceeds from the sale of this
gold. The European banks involved are the Swiss
"Big Three" -- Union Bank of Switzerland, Swiss
Credit Bank, and Swiss Bank Corporation -- plus
several others, which probably include the Deutsche
Bank and Credit Commercial de France.
7. Deliveries under this agreement already have
begun. On 7, 16, and 21 August, shipments of standard
(12.5 kilogram) bars, each shipment totaling 8.5 tons,
were flown from Johannesburg to Zurich on a flight
chartered through Balair, a subsidiary of Swissair.
Two similar flights, scheduled for 3 and 11 September,
will each carry 11.4 tons of gold to Zurich, bringing
to 48.3 tons the total delivered and scheduled.
8. The shipments to the Swiss and the purchase
of go:_d by the Bank of Portugal appear to be the
only South African gold sales undertaken during the
period 1 July through 30 August. South Africa re-
ported gold reserves of $974 million at the end of
June and $1,028 million on 30 August, an increase
of $54 million. From 1 July through 30 August,
known gold sales were about $128 million -- $96 mil-
lion to Portugal and about $32 million to the Swiss
banks. To cover these sales and increase reserves
by $54 million, South African gold production would
have had to be $182 million -- a figure consistent
with the estimated average monthly gold output of
about $90 million.
9. It is clear that the consortium led by the
"Big Three" Swiss banks has outmaneuvered the con-
sortium headed by the Engelhard interests in the
competition for South African gold.* Engelhard rep-
resentatives in South Africa have learned through an
unidentified contact of the second and third Balair
charter flights to Zurich. While their guess of
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10 tons per shipment is close to the actual amount
sent, they do not know the name of the consignee
and apparently are unaware of the first and the
scheduled fourth and fifth shipments. Moreover,
they are unsure as to whether the South African
sales are destined for official or free market
buyers.
The Beirut Gold Market
11. Frequent political and economic uncertainties
stimulate strong demand for gold from Middle Eastern
and other customers. Most Middle Eastern governments,
except for the Persian Gulf sheikdoms, prohibit the
free import and export of gold. Beirut is a logical
source of gold for smuggling into Middle Eastern
countries because of its excellent banking and com-
mercial facilities and the fact that the Lebanese
government permits gold to be imported legally, with-
out taxes or other restrictions. The major sources
of supply for the Beirut market are London and Zurich,
although dealers in Frankfurt now are trying to
acquire a share of this market. The exact amount
supplied from each European center cannot be deter-
mined accurately, because much of the gold eventually
destined for Beirut can be traced only as far as
Brussels, where transshipments totally obscure the
gold's ultimate destination.
12. Judging from the amount of gold imported
legally into Lebanon, the volume traded in the
Beirut market is smaller than that traded in the
four major European markets. Prior to the estab-
lishment of the two-tier price system in mid-March,
the largest amount of legal gold imports recorded
in recent years was 13 tons, in December 1967.
Fragmentary information on transactions since mid-
March indicates that the average monthly volume
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of gold flowing into Beirut has remained high --
on the order of 10 to 15 tons. Of the gold entering
Beirut, about 600 kilograms per month are used in
the manufacture of jewelry. The remainder is pur-
chased by speculators and smugglers, at which point
the gold leaves overt markets and passes from sight.*
13. In addition to its gold imports, which are
either retained in Lebanon (for processing or hoards)
or subsequently exported via illegal channels,
Beirut also runs a fairly considerable transit
trade. During the height of the international gold
crisis in mid-March, as much as 15 tons of gold
passed through Beirut in transit to other Middle
Eastern countries. The amount of gold now transit-
ing Beirut is substantially below the March level.
14. Since mid-March, prices in the Beirut market
have varied anywhere from a few cents to several
dollars above those prevailing in London and Zurich.
This spread reflects only partly the cost of trans-
porting the gold from European centers, and is
mainly the result of local and regional fluctua-
tions in demand. These factors tend to introduce
discontinuities in demand, to which supplies cannot
always rapidly adjust, thus causing wider price
fluctuations than occur in the European markets.
15. The major customers for Beirut gold are
Israelis, Turks, and the Persian Gold sheiks (par-
ticularly of Kuwait, Qatar, and Bahrein). Gold
sovereigns are in particular demand in Israel.,
although one-kilogram bars also hate been purchased
in quantity. The Israelis pay for their gold in
large-denomination US notes
' Nearly all of the gold imported by Beirut
dealers and sold to Lebanese speculators, hoarders,
small industrial users, and smugglers is in the
form of 1-kilogram bars (2.2 pounds). One-kilogram
bars are standard in mai'kets catering to numerous
small buyers. By contrast, 12.5-kilogram bars are
standard in large, international markets like
London and Zurich, which cater to fewer but much
larger buyers.
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16. Banks, commodity and foreign exchange
brokers, and export-import houses are the major
dealers in the Beirut market. Most Beirut banks
currently engage only in legal gold transactions
on their customers account, but a few banks and
many of the nonbank intermediaries actively par-
ticipate in the illicit gold trade for the high
profits involved. Gold import transactions of
any size normally are consigned throu h a bank to
minimize risk.
17. Three Beirut banks -- Societe Bancaire du
Liban (formerly Banque Zilkha) , Banque Credit
National (formerly Banque Safra), and Banque
Sabbag -- presently control most of the legal gold
traffic in Lebanon.* An official of Banque Sabbag
recently estimated that Societe Bancaire du Liban
controls 80 percent of the gold trade in Beirut.
Banque Sabbag, however, is also deeply entrenched
in the Beirut gold market, in part because it is
the Beirut representative of Samuel Montagu (one
of the five London gold dealers) and also because
of its affilation with the Banque de l'Indochine --
a large international gold dealer.** Under present
arrangements, Banque de 1'Indochine appoints the
president-director general of Banque Sabbag. Since
1961, this position has been held by Paul Antoine
Milhomme, a French citizen, who in addition to his
Societe Bancaire du Liban and Banque Credit
National are Beirut's two Jewish banks, owned re-
spectiveZy by the ZiZkhar and Safra families. As
a result of Arab-Israe Zi tensions, some pressure
has been placed on the two families because both
have indicated a strong desire to leave the Middle
East.
** The Sabbag heirs control 50 percent of the
Banque Sabbag while a second partner, Banca Com-
merciale ItaZiana, owns 25 percent and Banque de
Z Indoehine the remaining 25 percent.
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duties at Banque Sabbag also runs the Beirut office
of Bullion Exchange and Trading Company, Ltd. --- a
small precious metals, commercial financing, and 25X1
foreign exchange firm headquartered in Lausanne,
Sw t-v
I
a *4
er
an
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23. Thus far in 1968 the Lebanese central bank
(Banque du Liban) has made four purchases of gold
from the New York Federal Reserve Bank totaling
$94.7 million. The stated purpose of these trans-
actions is to maintain a gold cover of 80 to 85 per-
cent for Lebanese currency. There is no evidence
that any of this gold has been sold on the free
market or that Banque du Liban has purchased gold
in the free market. As evidence that the central
bank was adhering to the principles drawn up at
the Washington Conference, one central bank offi-
cial cited the bank's support of the dollar in the
Lebanese market during late March when Lebanese
citizens showed a decided preference for gold-
backed Lebanese pounds. Among members of the
Lebanese financial community, there is strong dis-
agreement regarding the economic soundness of a
policy designed to provide such a high gold cover
for the currency. The most vociferous dissenter
is Pierre Edde (recently appointed Minister of
Finance), who feels that large purchases of gold
are costing the government of Lebanon substantial
amounts of sorely needed income which could have
been earned by placement of funds in interest-
bearing foreign accounts.
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