THE WORLD GOLD MARKET IN 1972 AND PROSPECTS FOR 1973

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700050010-4
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 19
• Document Creation Date: December 20, 2016
• Document Release Date: March 10, 2006
• Sequence Number: 10
• Publication Date: February 1, 1973
• Content Type: IM

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7i s
25X1
Confidential
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
International Finance Series
The World Gold Market in 1972 and Prospects for 1973
Confidential
ER IM 73-12
February 1973
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CONFIDENTIAL
CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
February 1973
THE WORLD GOLD MARKET IN 1972
AND PROSPECTS FOR 1973.
1. This memorandum, one of a series begun shortly after the two-tier
gold market was established in March 1968, reviews and updates
developments in both the free and official gold markets through 1972.
Attention is focused on the decline of South African production and sales,
Soviet re-entry into the market, and the rise in the free market gold price.
The outlook for gold in 1973 is also considered.
HIGHLIGHTS
2. The volume of gold sales by the non-Communist countries in 1972
declined to 1,070 metric tons, about a one-third drop from 1971. South
African production fell from 980 to ,900 tons while the volume of South
African sales declined to somewhat less than 700 tons. The decline in South
African sales is explained largely by the improvement in South Africa's
balance of payments and the increased free market gold price.
3. The Soviet Union, probably to obtain foreign exchange for its
large grain purchases, sold large quantities of gold for the first time since
1965. Soviet sales in 1972 were about 150 tons, valued at about US $250
million to $300 million. These sales, which were less than current
production, were not sufficiently large to compensate for the South African
shortfall.
Note: This memorandum was prepared by the Office of Economic
Research.
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4. The free market gold price reached a record $70 per troy ounce
in August 1972 before stabilizing at about $64 an ounce. The major factor
in the price rise was the decline in supply. Speculative demand, although
helping to produce sharp periodic price fluctuations, probably had only
a small impact on the gold price for the year as a whole.
5. The U,S official gold window has remained closed since 15 August
1971, and non-IMF official gold transactions in 1972 were consequently
reduced to a trickle. The European Community (EC) has agreed to dispense
temporarily with gold settlements in official intra-EC monetary transactions.
6. Conditions in the world gold market in 1973 are likely to differ
little from 1972. Pretoria will probably increase gold sales slightly - by
about $100 million -- as the Republic's trade balance deteriorates. Although
Moscow often acts unexpectedly, Soviet sales will probably continue at a
high level - between 150 and 200 tons - because of continuing foreign
exchange requirements. Other suppliers are expected to offer roughly the
same volume as in 1972. With basic consumption continuing to grow
moderately, the price in the absence of speculation in 1973 should average
about $58 an ounce. Obviously, if Soviet sales vary significantly from the
amount projected, the price will change accordingly. Similarly, speculation,
whether motivated by rumors of Soviet actions or discordant notes in the
international currency market, could produce wide fluctuations in the price.
Little activity is expected in the official market.
7. With sales from official holdings largely halted, newly mined gold
is the only important source of supply. World gold production in 1972
totaled 1,450 tons, down slightly from 1,480 tons in 1971 (see Table 1).
South African production, more than 62% of total output, decreased 8%,
but this was largely offset by a 23% increase in Soviet extraction. The
South African drop largely reflects the decision to mine lower grade ores
made profitable by rising free market prices.1 Although a portion of the
important West Driefontein mine was closed for about three months because
1. In South Africa the richness of the ore extracted varies inversely with the price. Because of
the mining technology employed, working lower grade ores, which become profitable to extract
when the price rises, increases the value of in-ground reserves and the mine's life.
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CONFIDENTIAL
World Gold Production
Metric Tons
1970
1971
1st
Qtr
2nd
Qtr
3rd
Qtr
4th
Qtra
Totala
Total
South Af
i
1,475
1,480
350
365
36.
370
1,450?
r
ca
Oth
F
W
1,000
980
220
225
225
230
900
er
ree
orld
Sovi
t
270
280
70a
70a
70a
70
280
e
205
220
60a
70a
70a
70
270
of a fire, this accounts for less than 10% of the drop in South African
production. The Soviet rise is attributable largely to the completion of a
major new processing plant. There were no significant new gold discoveries
during the year.
8. Pretoria and Moscow for the most part sell gold only to meet
foreign exchange requirements. Most other countries market their entire
output of newly mined gold. The condition of South Africa's balance of
payments essentially determines what proportion of the Republic's newly
mined gold and gold reserves will be sold in the free market, although the
marketing policies of the Swiss "big three" banks - Union Bank of
Switzerland, Swiss Banking Corporation, and Swiss Credit Bank - which
market most of South Africa's output, also play a role. Soviet hard currency
requirements affect the level of Soviet sales.
South African Sales
9. An improved balance of payments and a record gold price enabled
South Africa to withhold almost one-fourth of its newly mined gold in
1972 (see Table 2). An exceptional harvest boosted agricultural exports
while high inventories continued to restrict the demand for imports. Thus,
Pretoria reduced its trade deficit, excluding gold transactions, to $1. 1
billion - from $1.9 billion in 1971 and $1.6 billion in 1970 (see Table 3).
The deficit on services was also reduced somewhat while the level of private
net long-term capital inflows remained high. The payments deficit to be
financed by gold sales, net government borrowing, monetary movements,
and changes in reserves was consequently reduced to $1.1 billion. This
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Metric Tons
1970
1971
1st
Qtr
2nd
Qtr
3rd
Qtr
4th
Qtra
Totala
Total
1,771
1,602
347
326
303
275
1,251
South Africa
1,398
1,203
221
170
143
155
689
Other Free Worldb
370
380
95a
95a
95a
95
380
Sovietc
3
19
31
61
65
25
182
a. CIA estimate.
b. Including sales of scrap.
c. Including other Communist countries' sales in 1972.
deficit was more than covered by the Republic's gold sales, which realized
$1.2 billion, or 20% less than in 1971.
10. The decline in the volume bf South African gold sales was more
pronounced than the decline in the value.2 In 1972, Pretoria probably sold
somewhat less than 700 tons of newly mined gold at an average price of
about $55 per troy ounce. In 1971, Soutli Africa sold little more than
1,200 tons, or 75% more, but at an average price of only $40. The volume
of sales, already down about 15% from 1970 to 1971, fell another 50%
by the third quarter of 19',2. The newly mined gold withheld from the
market was added to South African reserves, which at year's end totaled
about 555 tons - valued at the official price of $38 per ounce at
$678 million.
11. With the free market price well above the official price, Pretoria
had no incentive to sell to monetary authorities in 1972. Free market sales
consequently increased to 99% of total sales, compared with 87% in 1971
and 57% in 1970. The only official transaction was a $4 million sale to
Mozambique in January. No sales have been made to the International
Monetary Fund (IMF) since July 1971.
12. Most of South Africa's sales were handled by the Swiss batik
consortium. Most of this gold was shipped by sea directly from South Africa
to the United Kingdom and then released to the Swiss banks to be sold
2. For details on weekly gold sales, sec Table A-1 in the Appendix.
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Trade balance
Exports
Imports
Current account
balance
Private long-term
and short-term
capital flows
To be financed
Public long-term
and short-term
capital flows
Foreign exchange
movements and
valuation adjust-
ments
Gold salesb
South African Balance of Payments
1970
1971
1st
Qtr
2nd
Qtr
3rd
Qtra
4th
Qtra
Totals
-1,600
-1,894
-348
-196
-199
-367
-1,110
2,017
2,143
578
723
685
645
2,631
-3,617
-4,037
-926
-919
-884
-1,012
.3,741
-2,330
-2,657
-499
-338
-351
-525
-1,713
612
756
186
262
52
100
600
-1,718
-1,901
-313
-76
-299
-425
-1,113
146
276
8
-80
30
100
58
-48
78 ?
-42
-138
-31
33
-178
1,620
1,547
347
294
300
292
1,233
a. CIA estimate or preliminary.
b. Estimated from balance of payments.
on world markets. London banks and European bullion dealers most likely
accounted for the remainder of South Africa's sales.
Soviet and Other Communist Sales
13. During the year the Soviet Union began selling large quantities
of gold for the first time since 1965, probably in anticipation of the hard
currency needs arising from the subsequent large grain purchases from the
West. These sales were not sufficiently large, however, to compensate for
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the drop-off in South African supply. The USSR first entered the market
in March 1972 in a manner calculated to avoid depressing the price; sales
averaged only about one ton per day through May. Sales resumed in late
July at rou only the same rate. The total sales volume through the end of
the third quarter was about 140 tons. Sales dropped considerably in the
fourth quarter, and total 1972 volume is estimated at 150 tons, valued
at about $250 million to $300 million. US imports of Soviet gold through
Switzerland or the United Kingdom totaled about 15 tons.
14. Soviet sales in the free market currently are handled by the same
Swiss consortium that deals in South African gold, a change from past years,
when all Soviet gold was sold by London dealers. The gold is shipped to
Zurich by air and is stored in either consortium vaults or at a Soviet-owned
bank. Gold sales generally are made from Zurich inventories, but the
consortium occasionally sells against delivery from Moscow-based stocks.
15. Free market sales by other Communist nations totaled only about
30 tons during 1972 - mostly from East Germany.
Other Nat-Communist Sales
16. Other sales have remained relatively constant at about 380 tons
annually since 1970. Sales of newly mined gold from Canada, United States,
West Germany, Australia, Japan, the Phillipines, and Rhodesia declined
slightly, to about 280 tons in 1972. Sales of gold from scrap and other
secondary recovery increased slightly and totaled about 100 tons in 1972.
Gold Consumption
17. Basic gold consumption in non-Communist countries has been
increasing about 3%-4% a year as a result of rising income, population
growth, and technological changes, inducing greater use of gold in industry.3
In 1972, however, the shad drop in supply led to a reduction in commercial
purchases.4 Basic consumption is estimated to have totaled about 1,200
ton; in 1972, a decline of about 16% from 1971.
18. Most of the decline in consumption was accounted for by the
drop in the demand for gold for hoarding and for jewelry. Traditional
hoarders from the Far East and the Middle East purchased gold actively
3. We define basic consumption as effective non-monetary demand for commercial (artistic, dental,
and industrial) purposes a:ud accumulation for hoarding as distinct from demand for speculative
purposes.
4. For details on weekly basic consumption, see Table A-2 in the Appendix.
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in the early months of the year but dropped out of the market when the
gold price increased in June. There were even indications of dishoarding
from these areas as the summer wore on and prices rose. Because of the
high gold price, jewelry producers - who account for about 70% of total
basic consumption - also cut back new gold purchases somewhat and, at
year's end, were probably reducing their inventories. New industrial
applications for gold probably more than offset reductions in demand
resulting from the high price and more efficient industrial usage. Dental
demand probably increased slightly in 1972.
19. There were periodic outbursts of net speculative buying in 1972.
These were motivated by factors such as the spring currency crisis and the
ensuing capital controls which diverted some speculative funds from the
currency market into the free gold market, rumors of a US-Soviet agreement
to raise the official gold price, and intensified fighting in Indochina. For
the year as a whole, net speculative purchases probably totaled around 62
tons, or about 5% of total gold sales.
20. The overall net speculative buying in 1972 contrasts with the net
speculative sales of the previous two years. The speculative overhang which
developed in the period between the devaluation of sterling in November
1967 and the creation of the two-tier gold market in 1968 probably was
essentially sold off by mid-1971. Speculative activity increased during the
summer and fall of 1971, but, following the Smithsonian agreement,
speculators apparently began to accept that the official gold price would
not be substantially raised and moved out of gold into other assets.
21. The free market gold price began the year at $44 per troy ounce,
edged upward through May, and rose to about $67 at the beginning of
June before dropping off slightly (see Figure 1). It remained at about $65
until in a sudden surge it reached a record $70 on 2 August, nearly double
the official price. After reaching this peak, the price eased somewhat and
stabilized during the last three months of the year at around $63-$65 per
troy ounce.
22. The increase in the free market gold price in 1972 is largely
explained by the decline in gold supply. Gold sales totaled only 1,251 tons
in 1972, or almost 22% less than in 1971, while the average free market
price, about $585 per troy ounce; was up 41%. Considering that rising
incomes were pushing up gold demand, it is not surprising that prices rose
more than supply fell. Speculative demand clearly was also a factor pushing
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Jan. Feb Mar Apr May Jun Jul Aug , Sep
up the price, but an analysis of weekly variations in the price and supply
shows that most of the price variation is explained by variations in suppiy.6
23. Zurich's position as the world's most important gold market
continued to solidify in 1972, helped by the periodic closing of the London
market as a result of political and economic problems in the United
Kingdom. The consortium's bold trading philosophy and Zurich's central
location in the German-Swiss-Italian "gold corridor" have also been prime
factors. In 1972, about 75% of the gold traded on world markets was sold
in Zurich, with most of the remainder handled in London.
24. The world's first gold futures market opened in Winnipeg, Canada,
on 15 November 1972. Gold is sold there for delivery to specific Canadian
cities in January, April, July, and October up to one and one-half years
later. Most of the trading is done by US industrial firms, banks, and security
houses licensed to deal in gold. Some observers expect that futures trading
will remove some short-term speculative transactions from the more
well-established markets. The relatively poor communications and the time
difference between Winnepeg and other gold centers, however, and the high
costs associated with the initial trading will hold down the new market's
impact.
The Official Market
25. The US official gold window has remained closed since 15 August
1971 despite some foreign pressure for its reopening. In February the dollar
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was officially devalued and the gold price was increased to $38 per troy
ounce. This increased the value of US gold reserves by $828 million. The
only major outflow during the year was a $544 million sale to the IMF
in February to liquidate an outstanding obligation. Other US official sales
totaled only $3 million.7
26. Gold's attraction as an official re -erve has grown as the free
market price has risen. National officials have consequently sought to keep
.their gold reserves intact in times of payments difficulties. The United
Kingdom, for example, borrowed against its non-gold reserves during the
summer run on sterling rather than risk a portion of its gold reserves to
support the pound. Italy threatened to drop out of the EC currency
arrangement which, among other things, called for a member state to repay
debts arising from central bank intervention in the same proportion as its
reserves of gold, Special Drawing Rights, and foreign currencies. Rome was
persuaded to keep the lira in the EC band by receiving permission to repay
intervention obligations in dollars - thus preserving its gold reserves. The
EC has tentatively agreed to permit repayment in reserves other than gold
by all members in 1973. In one of the few gold settlements among European
central banks in 1972, the Netherlands repaid in gold part of a debt to
Belgium incurred when intervention was required to maintain the narrow
Benelux currency limits.
Prospects
27. World gold produc'ion is not likely to change significantly in 1973
regardless of how the free market price behaves. The economics of gold
production dictate that a significant increase in output must be preceded -
by about three to four years - by additional capital investment. No major
new mining investments have occurred in recent years. Although some older
mines scheduled for closure will remain open if the gold price remains high,
this will be offset by the practice of mining lower grade ore.
28. World gold supply will probably increase slightly in 1973 because
of increased South African and Soviet sales. South Africa's trade account
is expected to deteriorate somewhat. An expected decline in agricultural
production will retard the growth of non-gold exports, while import growth
should resume to meet the demand associated with increased economic
activity. The deficit on services and transfers should also grow, while net
private capital inflows should fall off somewhat because of increased UK
restrictions on overseas investment. Overall, Pretoria is expected to have
to finance a payments deficit of about $1.4 billion through gold sales, net
7. Although the official window is closed, the United States is still willing to sell gold to new
IMF members needing gold to meet subscription requirements.
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public capital inflows, and reserve changes. Th? value of South African gold
sales is consequently expected to increase about 10%--15% over 1972, with
sales likely to be lager in the second half of the year than in the first
half.
29. The level of Soviet gold sales is determined by the urgency of
foreign exchange requirements and the availability of alternate means of
finance. The Soviet hard currency trade deficit is expected to increase
greatly in 1973, to about $1.8 billion, as a result of unusually large grain
purchases from the West.8 Moscow, however, has excellent access to credits
and would probably choose to borrow to avoid reducing its gold reserves.
Consequently, we expect Soviet gold sales to be less than 300 tons (the
expected level of production) and more probably between 150 and
200 tons.
30. The free market gold price in the absence of speculation should
average about $58 an ounce in 1973 - the same as the 1972 average -
given the above supply projections and the upward trend in demand. The
price probably will show a downward trend from the current $64 during
the year, since South Africa's foreign exchange needs - and gold sales -
will peak toward year's end. Speculation, however, could cause short-run
price fluctuations. Possible sources of future speculation include changes
in Soviet gold marketing plans and uncertainty in the international currency
market.
31. The official tier of the gold market is expected to remain quiet
during 1973. The role of gold in the new monetary system will be an
important issue in international monetary reform negotiations, however.
France and Italy, which hold a significant share of their reserves in gold,
have raised the possibility of a three-tier gold market; in addition to the
official US price and the free market price, there would be an intermediate
price for the settlement of EC central bank claims. Nevertheless, if and
when overall monetary reform is achieved, it is almost certain that gold
will play a less important role in the monetary system.
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SPECULATIVE DEMAND AND ITS FREE MARKET IMPACT
In this Appendix, estimates of gold supply and basic consumption are
used to calculate the level of net speculative demand and its impact on
the free market in the 1970-72 period.* The Appendix makes use of a
simple market clearing equation in which the level of net speculative demand
equals total gold supply less the level of basic consumption.
Gold supply is estimated from reported weekly South African and
Soviet sales (see Table A-1) and quarterly sales figures for other suppliers -
both sales of scrap and sales by other non-Communist countries. A 12-week
moving average is applied to the South African and Communist sales data
to reflect the adjustments made by the Swiss banks that act as middlemen
between these producers, whose sales fluctuate widely from week to week,
and the ultimate gold purchasers, who buy at a more stable rate. A 12-week
moving average was chosen because it explained short-term price movements
better than did moving averages for other reasonable time periods, although
the results are not substantially affected by the period of the moving
average. It is assumed that sales of scrap and sales by other non-Communist
countries are evenly distributed over the 145-week period under
examination.
asic consumption in 1970 was
Mama e o o a , ons, ase on a gold price of $36 per troy ounce.
The volume of demand was estimated to increase about 3%-4% annually
if the real gold price remained constant (see Table A-2).
The price elasticity of demand was estimated
be approximately unity or somewhat more.** On the basis of this elasticity,
basic consumption is calculated to total about 1,434 tons in 1971 at an
average free market price of $41 per troy ounce and about 1,200 tons
in 1972 at an average free market price of $58, assuming a 5% annual
general increase in world prices and adjusting for the currency realignment.
The unitary elasticity of demand estimate was developed from earlier studies
for a period of relative price stability. The level of basic consumption is
consequently also calculated for two alternate elasticity estimates, an
elasticity of 0.7 and an elasticity of 1.3.
* Net speculative demand Is defined to include long-run changes in inventories, including the
inventories of the Swiss consortium.
** The price elasticity of demand is the numerical relationship (quotient) between the percentage
change in the volume of demand and the percentage change in price.
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Free Mullet GoW Supply 1970.1972
77soussnd 7hvy Ounces
7lvelve-Week
7Welve4Veek
moving
moving
South
Average
South
Average
Week
AJHrnn
Soviet
of 7btal Week
African
Soviet
of 7btal
Ending
Sales
Sales
World Saks Ending
Sales
Saks
World Sales
May
70
8
1000
0
709
20
524
n
Olin
15
Soo
0
910
27
660
0
04G
22
G50
0
901
Sep
3
602
0
050
29
500
0
909
10
4)02
0
057
Jun
5
0o0
0
909
17
651
0
061
12
G5l
0
910
24
570
0
n70
19
750
0
909
Oct
1
052
0
067
26
501
0
901
8
627
0
035
Jul
3
901
n
909
i5
702
0
091
10
GOO
0
913
22
631
0
890
17
000
0
913
29
7'111
0
115
24
701
0
097
Nov
5
503
0
'935
31
901
0
910
12
7117
0
9bG
Aug
7
GOO
0
098
19
711
0
952
14
701
0
898
26
G82
0
933
21
500
0
0G4
Dec
3
003
0
922
28
900
0
Olin
10
901
0
912.
Sep
4
009
0
035
17
026
0
909
11
001
0
035
24
596
0
910
18
501
0
016
31
401
0
894
25
400
0
833
Jan
72
7
578
0
084
Oct
2
Ono
0
one
14
501
0
873
9
451
0
Ono
21
702
0
850
16
702
0
790
28
601
0
039
23
675
0
765
Feb
4
554
0
835
30
802
0
7153
11
604
0
047
Nov
6
1101
0
763
18
554
0
877
13
1151
0
74)3
25
527
0
Sol
20
432
0
71,0
Mar
3
520
234
904
26
512
0
751
10
551
234
907
Dec
4
549
21
730
17
501
234
922
11
479
21
720
24
526
234
933
18
044
21
721
30
391
234
944
24
377
21
740
Apr
7
548
2311
955
31
227
21
751t
19
501
234
947
Jan
71
8
453
0
770
21
551
23It
915
15
G51
0
794
28
451
234
070
22
721
0
793
May
5
501
234
844
29
621
0
001
12
452
2311
809
Feb
5
G22
0
012
19
434
0
704
12
G27
0
031
26
378
0
743
19
G7G
0
8G3
Jun
2
251
0
710
26
G75
0
873
9
419
0
673
Mar
5
Got
0
861
16
330
0
655
12
601
0
855
23
327
0
G42
19
620
0
060
30
296
0
63G
26
G 2 G
0
056
Jul
7
33.3
0
653
Apr
2
577
0
054
14
341
0
666
8
501
0
856
21
276
190
G91
16
G52
0
035
28
397
190
699
23
G 7 G
0
342
Aug
4
422
190
719
30
577
0
838
11
439
190
742
May
7
601
0
835
18
340
190
750
14
705
0
834
25
3452
190
776
21
426
0
031
Sep
1
322
190
702
28
677
0
039
8
307
190
781
4
552
0
041
15
413
190
.708
11
59G
0
032
22
372
190
746
18
G08
0
837
29
359
190
728
25
551
0
035
Oct
6
393
32
720
Jul
2
590
0
820
13
420
12
710
9
G77
0
3115
20
398
32
7011
16
576
0
032
27
3114
32
r, 0n
23
G20
0
3111
Nov
3
300
32
600
30
577
0
842
10
4011
32
677
Aug
6
625
0
Bit!
17
404
32
660
.13
62G
0
8119
24
1103
32
645
12
Approved For Release 2Q00W,/ P 00875 R001700050010-4
 Approved For Release 2O AboiMiTN 11 V00875R001700050010-4
Afd
Cbnatant
At The Flee A/arket
Gold IWce Amlmind
An ekutk?ity of
Week
Ate
Constant
R
l
At 77u Free Market
Gold211nAutmblr
An elasticity of
Week
)ding
Rml
Goldtlkv
0.7
ea
May
70
8
20,50
20.23
20.00
27.94
20
29.89
17.75
26.20
25.10
is
20.60
20.39
20.31
211.22
27
29.91
20.29
27.6.3
26.07
22
20.02
211.411
28.42
20.30
Sop
3
29.91
28.06
27.29
26.54
29
20.63
20.70
20.02
20.80
10
29.95
20,12
27.97
2G.611
Jun
5 '
20.05
20.94
29.06
29.19
17
29.97
27.97
27.15
26.36
12
28.67
20.74
20.77
20.60
24
30.00
27.00
26.91
26.05
19
20.69
211.911
29.04
29.15
Oct
1
30.02
27. 06
27.02
20.10
26
20.71
211.92
29.01
29.10
8
30.04
27.90
27.03
20.19
Jul
3
20.71
29.02
29.14
29.26
15
30.06
27.09
27.01
26,16
10
20.75
29.05
29,19
29.32
22
30.00
27.96
27.10
26.27
17
20.77
29.12
29.27
29.43
29
30.10
20. or.
27.23
26.43
24
20.79
29.16
29.31
29.47
Nov
5
30.12
20.11
27.29
20.49
31
20.01
29.24)
?9.37
29.54
12
30.14
27.117
27.09
26.24
Aug
7
20.03
29.24
29.42
29.60
19
30.16
27.03
26.00
25.97
14
20.05
20.31
29.51
29.71
26
30.18
27.73
26.74
25.79
21
28.07
29.26
29.42
29.59
Doc
3
30.20
27.59
26.54
25.53
28
20.09
29.07
29.15
29.21
10
30.22
27.67
26.05
25.06
Sop
4'
20.91
20.06
2n.n4
20.01
17
30.74
26.14
27.20
26.45
11
20.02
20.05
20.82
28.79
24
30.26
29.30
29.02
20.65
18
20.94
20.90
29.01
29.03
31
30.20
29.26
20.04
29.42
25
20.96
29.03
29.06
29.09
Jan
72
7
30.30
20.30
27.49
20.69
Oct
2
20.90
20.97
20.96
20.96,
14
30.32
20.31
27.49
26.69
9
29.00
20.60
20.54
20.40
21
30.34
20.36
27.55
26.76
16
29.02
20.41
20.15
27.09
28
30.36
27.70
26.75
25.75
23
29.014
17.95
27.50
27.05
Feb
4
30.30
27.97
20.99
26.05
30
29.06
20.62
20.43
20.24
11
30.40
27.49
26.33
25.22
Nov
6
29.00
20.711
.29.59
20.45
18
30.42
27.47
20.29
25.17
13
29.10
20.110
20.21
27.95
25
30.44
27.4n
26.30
25.17
20
29.12
20.53
20.29
20.04
Mar
3
30.46
27.67
20.56
25.49
26
29.14
20.59
20.15
20.12
1G
30.40
27.50
20.42
25.31
Dec
4
29.16
20.061
28.44
20.23
17
30.50
27.63
26.48
25.30
11
29.10
20,09
20.77
20.65
24
30.52
27.60
26.54
25 45
18
29.20
20.69
20.47
20.26
30
30.55
27.70
26.56
25.:7
24
29.22
20.05
20.09
20.53
Apr
7
30.57
27.75
26.62
25.54
31
29.211
20.90
20.70
20.61
19
30.59
27.39
26.13
24.92
Jan
71
8
29.20
20.07
20.71
20.54
21
30.^,1
27.43
26.17
24.97
15
29.20
20.59
220.30
20.01
28
30.G3
27.37
26.00
24.85
22
29.30
20.71
20.47
20.22
May
5
30.65
26. 06
25.30
23.99
29
29.32
20.G9
20.43
20.17
12
30.67
26.23
24.53
22.95
Feb
5
29.34
26.54
20.21
27.00
19
30.60
24.92
22.79
20.04
12
2 3G
20.35
27.94
27.52
26
30.71
24.60
22.147
20.46
19
29.)0
20.40
20.07
27.69
Jun
2
30.73
21s. 21
21.96
19.85
26
29.40
20.46
20 Or,
27.60
9
10.75
23.47
20.99
10.62
Mar
5
29.112
20.52
20.15
27.70
16
30.77
23.77
21.79
19,05
12
29.114
20.41
27.90
27.56
23
3n.79
23.30
20.77
18.116.
19
29.46
20.49
20.09
27.70
30
30.111
23.01
20.31
17.92
26
29.47
20.57
20.19
27.92
Jul
7
30.83
22.00
20. I's
17.77
Apr
2
29.119
20.61
29.24
27.07
14
30.85
22.99
20. 76
17.86
8
29.51
20.59
20.21
27.03
21
30.00
23,02
20.30
17.90
16
29.53
20.65
20.20
27.91
28
30.90
22.29
19.10
16.04
23
29.55
20.64
20.25
27.88
Aug
4
30.92
22.25
19.32
16.78
30
29.57
20.35
27.63
27.33
11
30.911
22.94
20.11)
17.75
May
7
29.59
20.35
27.03
27.32
18
30.95
22.75
19.94
17.47
14
29.61
27.69
26.91
26.15
25
30.90
22.66
19.81
17.33
21 ,
29.63
27.04
27.10
26.30
Sep
1
31.00
22.75
19.93
17.45
28
29.05
27.911
27.23
26.55
8
31.02
22.72
19.89
17.40
Jun
4
29'.67
2A.09
27.44
20.00
15
31.011
23.14
20.41
17.99
11
29.69
20.63
20.10
27.74
22
31.06
23.50
20.95
1n.62
18
29.71
20.49
27.90
27.110
29
31.00
23.53
20.89
18.54
25
29.73
20.45
27.92
27.40
Oct
6
31.11
23.24
20.51
18.10
Jul
2
29.75
20.35
27.77
27.21
13
31.14
23.40
20.00
18.43
9
29.77
28.40
27.91
27.38
20
31.17
23.44
20.75
10.36
16
29.79
20.25
27.62
26.99
27
31.20
23.58
20.92
18.55
23
29.01
27.07
27.07
26.30
Nov
3
31.73
23.74
21.11
10.76
30
29.03
27.55,
26.62
25.73
10
31.28
24.13
21.60
19.33
Aug
6
29.85
27.51
26,56
25.65
17
31.29
24.06
22.52
20.40
13
29.07
27.35
26.34
25.36
24
31.32
24.24
21.72
19.46
Approved For Release 2 f TALT00875R001700050010-4
 Approved For Release 2006/04/19 : CIA-RDP85T00875R001700050010-4
CONFIDENTIAL
The level of net speculative demand is calculated using the market
clearing equation and the estimates of gold supply and basic consumption.
It appears on the basis of this calculation that there was substantial net
speculative sales in 1970 and the first half of 1971 and three bursts of
speculative buying in late 1971 and 1972 (see Figur; 2). The pattern of
speculative activity is similar for all three estimates of the price elasticity
of demand, particularly during 1970, when the free market price was held
down by sales from the speculative &.verhang.
It is difficult to determine which elasticity estimate provides the best
picture of net speculative activity in 1971-72, although the results tend
to support the previous estimate of 1.0 or somewhat more. If the price
elasticity of demand were as low as 0.7, th; calculations show sales from
the speculative overhang continuing until November 1971 and speculators
continuing to sell on a net basis in 1972. This is not consistent with our
qualitative judgment or that of most market observers about speculative
beh 4vior In. 1971 and 1972.
The basic procedure described above is also used to calculate the price
that would have prevailed in the gold market in the absence of speculation.
This calculation makes use of an equation of which the price in the absence
o; speculation equals the value of basic consumption (assuming a unitary
price elasticity of demand) divided by gold supply.
The calculated price using this equation and the actual free market
price are shown in Figure 3. The interpretation of the results is analogous
to the interpretation given above. In periods where the calculated price
is above the actual free market price, there were net speculative sales; in
periods where the actual price is above the calculated price, there were
net speculative purchases.
Approved For Release 2008V4 1 .g 5ATt0875R001700050010-4
 Approved For Release 2006/04/19 P85T00875R001700050010-4
Figure 2
May 8 Jena Jtlf~ / Nov 10
1970 4074 1972
1972
CONFIDENTIAL
Derived using a price elasticity of demand of 1,3
..... Derived using a price elasticity of demand of 1.0
Derived using a price elasticity of demand of 0.7
CONFIDENTIAL
Approved For Release 2006104119P85T00875R001700050010-4
 Approved For Release 2006/04/19 : CIA-RDP85T00875R001700050010-4
CONFIDENTIAL
..'Free Market Gold Price vs
Price in the Absence of Speculation*
US Dollars Per Troy Ounce
30 1_
May 8 Jan 8 Jan 7
1910 1971 1972
'0aaed on the allernoon fix In London on the fast trading day in each wear,.
"Peke. of gold peeked at $70 pe, ounce on Wednaaday, 2 August.
ell7fl 717
Price in the
Absence of
spec0I,1tion
Nov 10
1972
Approved For Release 2006/04/19 : CIA-RDP85T00875R001700050010-4
CONFIDENTIAL