INTERNATIONAL FINANCE SERIES NO. 10

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CIA-RDP85T00875R001600010112-6
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RIPPUB
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S
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17
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December 22, 2016
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October 1, 2009
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112
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Publication Date: 
December 1, 1968
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IM
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Aooroved For Release 2009/10/06: CIA-RDP85T00875R001600010112-6 D O C-5X1 P Secret DIRECTORATE OF INTELLIGENCE Intelligence Memorandum International Finance Series No. 10 The World Gold Market Secret ER IM 68-161 December 1968 Copy No. Qs Approved For Release 2009/10/06: CIA-RDP85T00875R001600010112-6 Approved For Release 2009/10/06: CIA-RDP85T00875R001600010112-6 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 RICLUDEDI, PUOW ApuTorpATc pML*Y1/rCATION Approved For Release 2009/10/06: CIA-RDP85T00875R001600010112-6 Approved For Release 2009/10/06: CIA-RDP85T00875R001600010112-6 cr,vJtJ I CENTRAL INTELLIGENCE AGENCY Directorate of Intelligence December 1968 INTELLIGENCE MEMORANDUM International Finance Series, No. 10 The World Gold Market Summa From the beginning of October through the first week in December, the United States increased its net gold reserves by $150 million, the free market price of go:-.d edged upward to nearly $41.00 an ounce, and South Africa sold $78 million in gold on the free market. The increase in US gold reserves was due largely to $J40 million of French sales. The United Kingdom, Turkey, and the Philippines also made gold sales to the United States of $15 million, $10 million, and $5 million, respectively. While purchasers were numerous, the amounts bought from the United States were generally small. Greece, Argentina, and Jordan accounted for more than three-quarters of the $22.6 million pur- chased by 23 countries. As part of an International Monetary Fund drawing in late November, Peru received $10 mil- lion in South African Rand. The South Africans, unable to supply the amount of key currencies desired by the Peruvians, exchanged the Rand for an equal amount of gold. The most significant free market development during the fourth quarter was another South African sale to the Swiss consortium. The 62.2-ton sale was divided into two equal deliveries of one million Note: This memorandum was produced soZeZy by CIA. It was prepared by the Office of Economic Research. SECRET 25X1 Approved For Release 2009/10/06: CIA-RDP85T00875R001600010112-6 Approved For Release 2009/10/06: CIA-RDP85T00875R001600010112-6 SECRET fine ounces each on 25 November and 2 December. Although the South Africans were able to take advantage of the higher market prices, the primary reason for the sale was to obtain badly needed foreign exchange, F Since mid-July the Rhodesian Chamber of Mines has been selling small amounts of newly mined gold to the Union Bank of Switzerland approximately every two weeks. The gold, totaling about six tons through the end of November, has been refined in South Africa and shipped to Switzerland through the Netherlands Bank of South Africa. Apart from these sales, the Rhodesian Reserve Bank in late October sold 4.5 tons of gold to the Union Bank of Switzerland. Keeping the Rhodesian Chamber of Mines and the Netherlands Bank of South Africa uninformed about the nature of the transaction, the Rhodesian Reserve Bank had the proceeds credited to the South African Reserve Bank. SECRET Approved For Release 2009/10/06: CIA-RDP85T00875R001600010112-6 Approved For Release 2009/10/06: CIA-RDP85T00875R001600010112-6 SECRET The Official Market for Gold 1. Thus far in the fourth quarter (through 6 December), the United States has added $150 million to its gold reserves. France again pro- vided the major share of the new acquisitions (see Table 1), particularly during the monetary crisis in November when the flight from the franc reached panic proportions. After a $30 million sale in October, France sold another $110 ni llion to the United States in November. This brings to $600 million the amount of French gold sales to the United States since the May-June disorders. Other major sellers during the fourth quarter included the Philippines, $5 million in October; the United Kingdom, $15 million in November; and Turkey, $10 million in December. Between 31 September and 6 December, about two dozen countries purchased a total of $22.6 million in gold from the United States. The chief buyers were Greece ($10 million) Argentina ($5 million), and Jordan ($2.8 million). As of 6 December, the only anticipated transaction was a $200,000 purchase by Pakistan. 2. The only other significant official gold transaction occurred during the third week in November when the South Africans exchanged $10 million in gold for an equal amount of South African Rand obtained by Peru in a recent Inter- national Monetary Fund (IMF) drawing. As Peru would have encountered difficulty in exchanging Rands for a vehicle currency (dollars or sterling) the South Africans willingly suppl:.ed the Peruvians with g_,~'.d. The Free Market for Gold 3. Although the monetary crisis in late November and early December pushed free market gold prices to their highest level in five months, a major speculative boom in gold did not occur. Gold prices in the major European markets remained comfortably below their record levels of late May and early June. Unlike the crises early this year, which reflected a weakening of confidence in the US dollar and expectations of an increase in the official price of gold, the latest monetary crisis was mainly confined to pressure on European - 3 - SECRET Approved For Release 2009/10/06: CIA-RDP85T00875R001600010112-6 Approved For Release 2009/10/06: CIA-RDP85T00875R001600010112-6 SECRET currencies. There was a widespread belief that the West German mark would be revalued upward and the French franc devalued, but, partly because of a marked improvement in the US balance of payments, the dollar remained strong. Gold prices were held down by South African sales in Zurich (see para- graph 4) but were pushed up by the worsening situation in the Middle East and monetary dif- ficulties in Western Europe. Strict control of movements of gold into and out of France forced the price of gold in Paris to $43.91 on 3 December, about $3 above the price in London and Zurich (see Table 2). The following day the price of the 20- franc Napoleon coin -- the form the small French hoarder prefers -- rose to $13.67, the highest level in 20 years. South Africa Again Sells Gold 4. During November, South Africa contracted to sell another 62.2 tons of gold to the consortium headed by the "Big Three" Swiss banks, the Union Bank of Switzerland, the Swiss Bank Corporation, and the Swiss Credit Bank.* Delivery occurred on 25 November and 2 December, ostensibly from South African gold stocks held in London and/or Switzer- land. 5. While the recent South African sales came at a time when free market gold prices were up (South Africa received $39.40 per troy ounce for the first delivery and $38.50 for the second), the timing of these sales was influenced less by market prices than by South Africa's need for foreign exchange. Available fourth-quarter data show a reversal of the favorable balance of pay- ments trends which previously enabled South Africa to withhold much of iai gold from the free market. Trade figures (excluding gold) for October reveal the largest monthly deficit in years with imports at a record $242 million. By the end of November, foreign exchange reserves had fallen to $113 * As previously reported, the Swiss consortium pur- chased 48.3 tons from South Africa during the third quarter of 1968. - 4 - SECRET Approved For Release 2009/10/06: CIA-RDP85T00875R001600010112-6 Approved For Release 2009/10/06: CIA-RDP85T00875R001600010112-6 SECRET million -- the lowest in more than three years and adequate for only two weeks' imports at the October level. 6. South African officials have been increas- ingly active in seeking outlets for their gold since conclusion of the annual meeting of the IMF in early October, when no agreement was reached regarding South African sales. The groundwork for the recent sales may have been laid during the European travels of Finance Minister Diederichs and South African Reserve Bank Governor Delon h followin the IMF meeting. Interestingly enough, once an agreement had been tentatively reached, it was the Swiss representative of the Union Bank of Switzer- land in Johannesburg, Walter Zehnder, who exerted pressure on Wilmot to agree to the sa'.e as early as 20 November. Had the South Africans acted immediately instead of-waiting until 25 November for the first sale, they probably would have realized a higher price. 7. The sale to the Swiss and the transfer to Peru appear to be the only gold transactions under- taken by the South Africans during October and November. South African gold reserves on 31 Sep- tember were $1,069 million. Production for October is reported at $921,5 million while output for 1-29 November is calculated at $83.5 million,** ** Production in November is estimated to have been about 9 percent below normal. This estimate takes into account the probable reduction in output resulting from the flooding of West Driefontein mine and the subsequent threat to the neighboring Blyvooruitzicht mine. West Driefontein, South Africa's richest mine, accounts for 8 percent of the country's gold (footnote continued on p. 6] SECRET Approved For Release 2009/10/06: CIA-RDP85T00875R001600010112-6 Approved For Release 2009/10/06: CIA-RDP85T00875R001600010112-6 SECRET bringing estimated reserves before sales on 29 November to $1,245 million. Reported reserves on the latter date, however, were only $1,190 mil- lion, leaving a difference of $47 million (see Table 4). The two known transactions -- the 31.1-ton sale to the Swiss on 25 November (equal to $35 million at the official rate for reserves of $35 per ounce), and the $10 million transaction with Peru -- total $45 million, or approximately the amount of the difference. 8. Although official South African gold re- serve statistics imply substantial gold sales, they do not reveal the timing of the sales to the free market. As shown in Table 4, the weekly increase in the reported reserves of the South African Reserve Bank is almost constant (about $14 million to $18 million) during October and November. The only significant exception is for the week of 16-22 November, when the reserves show an increase of only $3-million. This was also the week of the $10 million transfer of gold to Peru, 9. In a related development, the South Africans transferred an additional 10 tons (approximately $11 million), for their account, to the Union Bank of Switzerland an 17 December. The gold had been held by the Bank for International Settlements (BIS) on account for South Africa since 21 May, when South Africa swapped 10 tons of its gold held in the Bank of England for an equal amount of BIS gold stored output the BZyvooruitzieht mine adds another 2 per- cent to the total. While around-the-clock emer- gency action saved the West Driefontein mine, it was only 25 percent operational on 1 December. - 6 - SECRET Approved For Release 2009/10/06: CIA-RDP85T00875R001600010112-6 Approved For Release 2009/10/06: CIA-RDP85T00875R001600010112-6 SECRET in the vaults of the Swiss National Bank at Berne. The Outlook for South African Gold Sales 10. South Africa's normal annual gold output is about $1.1 billion. Prior to 1968, South African policy was to sell virtually all of its output through the London market. Output for 1968 prob- ably will be slightly below normal -- perhaps $1 billion -- because of the recent mine disasters. Hence, total sales for 1968 will be about 40 per- cent of normal. The free market has been able to absorb all of the South African sales to non- monetary customers this year (about $237 million) and probably can absorb at least three times this amount in 1969 without any significant drop in the free market gold price. With the price between $35 and $40 per ounce, industrial and artistic demand for gold is at least $700 million annually, and to this must be added a lump of private hoard- ing demand of uncertain amount. World private demand for gold probably is well in excess of $1 billion annually. Only one-third to one-half of the $2 billion to $3 billion "overhang" generated by the heavy private gold buying in the early months of 1968 remains outstanding. Much of this may in fact have found its way into permanent hoards, and, in any case, the remaining "overhang" no longer appears to be a very important "over- supply" factor in the private gold market. Thus the South Africans are likely to have a buoyant market in which to sell most of their output at prices somewhat above $35 per ounce. 11. The roughly $78 million received from the recent sales will finance South Africa's payments deficit for only a short time. Renewal of expan- sionary economic policies in South Africa, follow- ing a year of stabilization, is likely to keep trade deficits large. Available 1968 estimates already show signs of substantial expansion over 1966/67 levels in such indicators as fixed invest- ment, government outlays, and consumer expenditures. These developments, coupled with the South African preference for selling gold rather than borrowing, greatly enhance the likelihood of South African gold sales in the coming months. - 7 - SECRET Approved For Release 2009/10/06: CIA-RDP85T00875R001600010112-6 Approved For Release 2009/10/06: CIA-RDP85T00875R001600010112-6 SECRET 12. So far, virtually all of South Africa's sales of gold to the private market have been channeled through the Swiss bankers' consortium. Although the Swiss "Big Three" may be involved in future South African gold sales, there are several other intermediaries who would be willing to handle the metal. Figuring prominently among these is the Banque de Paris et des Pay-bas (BPPB), whose recent reorganization of foreign branches, particularly in Switzerland and the Netherlands, permits independent operation that will have no detrimental effect on the foreign exchange posi- tion of France. - 8 - SECRET Approved For Release 2009/10/06: CIA-RDP85T00875R001600010112-6 Approved For Release 2009/10/06: CIA-RDP85T00875R001600010112-6 SECRET Rhodesia Sells Gold 16. Between 19 July and the end of November, the Rhodesian Chamber of Mines sold nearly 190,000 ounces (5.9 metric tons) of gold to the Union Bank of Switzerland. In all, there have been 11 separate transactions, roughly one every two weeks. The Rhodesian gold is transported to South Africa, refined at the Rand refinery and then sh pped to Switzerland via the Netherlands Bank of South Africa. Most of the 5.9 tons, accounting for nearly 30 percent of Rhodesian annual output, has been sold for about $39.00 an ounce (less expenses). 17. Apart from these regular sales, a relatively large amount of gold, 144,300 ounces (4.5 tons) was sold directly by the Rhodesian Reserve Bank to the Union Bank of Switzerland in late October. The transaction had two unusual aspects: neither the Rhodesian Chamber of Mines nor the Netherlands Bank of South Africa were to know the nature of the transaction; and the proceeds from the sale were to be credited to the South African, not the Rhodesian, Reserve Bank. Although the transaction appears to have been a payment by Rhodesia rather than a sale of newly mined gold, the purpose of this payment is not known. - 9 - SECRET Approved For Release 2009/10/06: CIA-RDP85T00875R001600010112-6 Approved For Release 2009/10/06: CIA-RDP85T00875R001600010112-6 SECRET Sale of South Africa Gold Coins to the Union Bank of Switzerland 18. In early December the South African Chamber of Mines sold $1.4 million worth of gold coins to the Union Bank of Switzerland, which acts as an intermediary in sales to coin dealers and individual collectors. Such transfers between the Chamber and the Union Bank of Switzerland occur periodically, but because the amounts are relatively small, these sales have little impact on the world gold market. - 10 - SECRET Approved For Release 2009/10/06: CIA-RDP85T00875R001600010112-6 Approved For Release 2009/10/06: CIA-RDP85T00875R001600010112-6 Table 1 Gold Transactions with the United States October-December 1968 Millio US $ n 1-31 October 1-30 November 1-6 D b ecem er Country Purchase from the US Sale to the US Purchase from the US Sale t th Purchase Sale o e US from the US to the US France 110 United Kingdom Greece 15 Turkey Argentina Philippines Ireland Yugoslavia Jordan 2.8 Chile 0.9 Indonesia 0.4 Other 0.2 1.7 5.2 38 15.8 125 32.8 109.2 8.4 Approved For Release 2009/10/06: CIA-RDP85T00875R001600010112-6 Approved For Release 2009/10/06: CIA-RDP85T00875R001600010112-6 Price Range in the.London, Zurich, and Paris Gold Markets 7 October-6 December 1968 US $ er Fine Ounce London a/ Zurich Y b/ Pa i r s 7-11 October 38.825 to 39.80 38.75 to 39.88 38 94 to 39 96 14-18 October 38.95 to 39.49 38.75 to 39.50 . . 39 06 to 39 39 21-25 October 2 38.95 to 39.30 38.80 to 39:35 . . 39.05 to 39 31 8 October-1 November 38.90 to 39.60 38.75 to 39.65 . 39 14 to 39 56 4-,8 November 39.20 to 39.525 39.10 to 39.65 . . 39 25 to 39 58 11-15 November 18-22 39.50 -to 40.00 39.45 to 40.15 . . 39.79 to 40 27- (?j November 2 39.95 to 40.75 39.85 to 41.00 . 40.12 to 42 50 C) 5-29 November 39.70 to 40.30 39.60 to 40.20 . 41 02 to 42 27 ..2-6 December 39.90 to 40.775 40.00 to 40.75 . . 41.97 to 43.91 a. Based on morning and afternoon fixes. b. Not exactly comparable with London; these data consist of the lowest offer to buy and the higher offer to sell during the week. Approved For Release 2009/10/06: CIA-RDP85T00875R001600010112-6 Approved For Release 2009/10/06: CIA-RDP85T00875R001600010112-6 SECRET Summary of'South African Gold Sales 1 January-6 December. 1968 Million US $ at $35 per Fine Ounce Amount Location of Sales January 48.0 London February 23.0 London March 22.0 London April 0 May 0 June 42.0 To France and the United Kingdom 20.0 in return for Rand obtained by those countries in IMF drawings Probably Swiss commercial banks July 34.0 Portuguese Central Bank August 61.9 Portuguese Central Bank 28.8 Swiss commercial banks September 25.6 Swiss commercial banks 16.9 Portuguese Central Bank October November U 35.0 Swiss commercial banks 10.0 To Peru in return for Rand December 35.0 obtained in IMF drawing Swiss commercial banks Total 402.2 SECRET Approved For Release 2009/10/06: CIA-RDP85T00875R001600010112-6 Approved For Release 2009/10/06: CIA-RDP85T00875R001600010112-6 South African Gold Reserves 30 September-29 November 1968 Date Reported Reserves Estimate of Reserves Before Known S l a es 30 September 1,069 1,069 4 October 1,077 1 nRl 11 October 1,094 , 1,102 18 October 1,112 1,123 Cl) 25 October 1,129 1 144 1 November 1,147 , 1 165 C7 ~ Fri A 8 November 1,161 , 1,185 15 November 1,178 1 205 22 November 1,181 , 1,225 29 November 1,198 1,245 Million US $ Discrepancy 0 4 8 11 15 18 24 27 44 47 Approved For Release 2009/10/06: CIA-RDP85T00875R001600010112-6