IV. Gold Policy

International Monetary Fund
Published Date:
September 1951
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As noted in last year’s Annual Report, the Executive Board, in accordance with a resolution adopted by the Board of Governors at the Fourth Annual Meeting in September 1949, prepared a Report on External Transactions in Gold at Premium Prices. In the recommendations of this report, made public on May 3, 1950, it was stated that there was no reason to change the Fund’s gold policy as outlined in its letter addressed to all members on June 18, 1947. The Board of Governors, at the Fifth Annual Meeting in Paris last September, considered the report and took no action to change the Fund’s gold policy.

During the year under review, several members of the Fiyid made inquiries of the Fund regarding contemplated changes in their gold practices, and the Fund on each occasion, in accordance with its policy on Transactions in Gold at Premium Prices, which was communicated to members on June 18, 1947, opposed the introduction of any measures or arrangements that might help to make gold more readily available for premium markets.

In October 1950 and again in March and May 1951, the Canadian Government consulted the Fund with regard to proposed changes in its gold subsidy program. The first proposal was to extend the payment of subsidies to gold mines for another year beyond December 31, 1950, the original expiry date of the Emergency Gold Mining Assistance Act of December 1947, and at the same time to introduce modifications of the subsidy that would reduce both the rate of assistance and the proportion of output eligible for assistance. The proposals in 1951 were to provide for technical changes increasing the proportion of output eligible for assistance. The Fund’s Executive Board decided that the modifications of the subsidy were not inconsistent with the Fund’s policy. The Canadian subsidy plan is briefly as follows: the number of ounces on which the subsidy will be paid will be based on either the number of ounces produced in the benefit year (1951) in excess of one half of the number produced in 1948, 1949, or 1950 (year to be selected by mines), or one half of the number of ounces produced in the benefit year, whichever is the greater. The rate of assistance per ounce will, in 1951, be equal to half of the difference between $22 per ounce and the actual cost of production of gold from the particular mine. In no case would the bonus exceed $11.50 (that is, half of the difference between $22 and $45).

During the second half of 1950, there was a large increase in the volume of international transactions in gold at premium prices. At the same time there was a noticeable decline in the net amount of world gold production entering official monetary reserves. In the same period there was also a marked increase in the amount of gold purporting to be for consumption for artistic, industrial, and professional use. The Executive Board of the Fund, on March 7, 1951, made the following decision:

Since the amount of sales and purchases in the world markets of gold for jewelry, artistic and industrial purposes has recently been increasing at a rate indicating that at least a part of it finds its way to private hoards, contrary to the gold policy of the Fund established in June 1947, the Executive Board considers the existing arrangements and practices of several countries, including South Africa, are no longer a satisfactory basis to implement the Fund’s gold policy and directs the staff of the Fund urgently to elaborate, after consultation with the countries concerned, more effective methods than the existing ones.

This subject was still under investigation and consideration at the time of writing this Report.

Gold Prices in Free and Black Markets

After having reached new lows for recent years in May and early June 1950, the free market price of gold rose rather sharply in most markets, immediately following the outbreak of hostilities in Korea in June 1950. Subsequently, the price fluctuated under the influence of international political uncertainties. In most markets, the peak prices for the year under review were recorded during the first half of January 1951. Prices in all markets did not fluctuate to the same extent, but as indicated in Chart II, their general level in most markets was higher during the first four months of 1951 than during the preceding year.

Chart II (a).U.S. Dollar Prices of Gold Traded in Various Markets Directly for U.S. Dollars

Chart II (b).Paris U.S. Dollar Equivalent Prices of Gold Bullion Conversions at Parallel Market Rates

Chart II (c).Bombay Local Currency Prices of Gold Bullion

Chart II (d).Hong Kong U.S. Dollar Equivalent Prices of Gold Bullion Conversions at Free Market Rates

In Paris the price of bar gold rose from the equivalent of approximately $38 per ounce on May 26, 1950, to approximately $46 per ounce on July 26, 1950. By October 31, it had declined to about $40, but by January 8, 1951, had risen to approximately $47, and on April 30, 1951, was quoted at approximately $44 per ounce. The price of the Napoleon, which commands a premium over bar gold by the equivalent of approximately $12 per ounce, followed the same trend throughout the year under review.

In Hong Kong bar gold was quoted at the equivalent of approximately $37 per ounce on June 6, 1950, and by the end of the month had advanced to approximately $44 per ounce. During the last half of 1950 and the first four months of 1951, quotations fluctuated erratically between a low of about $38 per ounce on September 30, 1950, and a high of about $51 on January 19, 1951, and on April 30, 1951, was $46 per ounce.

The price at which gold was traded in various markets directly for U.S. dollars in general paralleled the trend of prices in the Paris and Hong Kong markets, but was not as erratic from day to day. At no time since the outbreak of hostilities in Korea had this price reached the high of $55 obtained in May 1949. There was a gradual increase from about $36 per ounce on May 23, 1950, with the peak price of $44 for two days early in January 1951, at a time when peak prices were reached in all markets. On April 30, 1951, the price was $41 per ounce.

The price of gold in Bombay did not follow the general price trends of other markets, and indeed during the fourth quarter of 1950 was slightly depressed. On May 8, 1950, bar gold was quoted at 119 rupees 14 annas per tola. By November 2, it had declined to 105 rupees 5 annas per tola, but by April SO, 1951, had risen to 116 rupees 7 annas per tola. When converted at the official rate of exchange, these quotations are equivalent to approximately US$67, US$59, and US$65 per ounce, respectively.

The increase in the price of gold during the past year reflects in the main the increased preference for gold at a time of great political uncertainty and renewed inflationary pressures. The increase in incomes in some of the countries in which gold is a traditional means of saving and the improvement in their terms of trade and balances of payments may also have added to the demand for gold.

Despite the pressure of demand, prices in premium markets in recent months have not reached the level attained in the year prior to the devaluations of September 1949. Part of the explanation for this appears to lie on the supply side of the market. During the past year sales of gold by South Africa for industrial and artistic purposes increased markedly and a portion of this gold doubtless found its way into premium markets for hoarding purposes. In addition, France and some other countries sold gold from their monetary stocks for the purpose of abating domestic inflationary pressures. These supply factors, in contrast with the corresponding supply situation before the devaluations, are part of the explanation of the markedly lower prices in the more recent period. It seems likely, however, that the lower prices indicate that the demand for gold since the outbreak of war in Korea has been less insistent than it was before the devaluations.

Gold Production

The postwar recovery in the world production of gold continued during 1950. Valued at $35 per ounce, total output (exclusive of the U.S.S.R. and North Korea) was approximately $850 million in 1950 compared with $825 million in 1949 and $740 million in 1945.

Most of the increased output in 1950 was in the United States and Canada. There was no significant change in the sterling area countries which by the devaluations of September 1949 raised their official price of gold by 44 per cent; in two of the most important gold-producing countries in this group, viz., South Africa and Australia, there was indeed a slight decline in output. In South Africa, the main reason why output failed to respond to the rise in price seems to be the policy of the mining companies to mill inferior ore when the price-cost relation becomes more favorable, and thus to prolong the life of the mines. But to a significant extent, the effects of devaluation were also offset by an increase in operating costs, though devaluation has accelerated the development of new mining properties in the Orange Free State.

Gold output in the United States increased for the first time since 1947. This was due mainly to the boom in the production of metals which yield gold as a by-product, and to the fulfillment of investment plans in some mines that had suspended operations during the war. Canadian output has shown a consistent recovery since 1945, which continued in 1950.

Apart from the devaluation and the general rise in prices, several other developments affected the profitability of gold mining during the year. The changes in subsidy arrangements have been referred to above. The rise in the price of gold in premium markets and increased premium sales since June 1950 have brought additional revenue to the gold mining industry, particularly in South Africa, which is, however, highly variable. Thus, the extra revenue from premium sales by the South African mines amounted to roughly 70 cents per ounce of gold produced during the second half of 1950, but to $2 per ounce in the first quarter of 1951.

Despite the steady increase in world gold production since 1945, the current rate of output (outside the U.S.S.R.) is still 25 per cent below the average level of 1937-40 and approximately one third below the peak level of 1940. The sharpest decline is in Asia, where current production is one fourth of the 1940 level, and in Australia and the United States, where it is about one half of the 1940 level. On the other hand, current output in Canada and South Africa is over 80 per cent of the previous peak levels.

Official Gold Reserves

Valued at $35 an ounce, the total stock of gold in the possession of monetary authorities in the world (excluding U.S.S.R. but including stabilization funds and international institutions) is estimated at $35,830 million at the end of 1950, i.e., approximately $420 million more than at the end of 1949. Thus the equivalent of roughly one half of the gold production of 1950 was added to official reserves; the other half was absorbed by industrial or artistic uses or disappeared into private hoards. Most of the increase in official reserves during the year occurred before the Korean War—the increase in the first half of the year was approximately $320 million, compared with only $100 million in the second half. The increase in the price of gold in premium markets and the hoarding wave that followed the outbreak of hostilities in Korea thus meant that the equivalent of more than three fourths of the current gold production went into nonmonetary uses in the second half of 1950 against one fourth in the first half of the year.

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