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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
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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
RICLUDEDI, PUOW ApuTorpATc
pML*Y1/rCATION
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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.
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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.
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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
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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.
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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]
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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.
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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.
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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.
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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.
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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.
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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
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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.
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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
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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
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