III Gold Policy
- International Monetary Fund
- Published Date:
- September 1952
After the completion of the study which the Executive Board of the Fund had, on March 7, 1951, instructed the staff to undertake, the Board, on September 28, 1951, issued a statement on external transactions in gold at premium prices. This decision, which modified the Fund’s gold policy statement of June 1947, is reproduced in Appendix IV.
In announcing this decision the Fund reaffirmed its belief in the economic principles on which the statement of June 1947 was based, and urged members to support the policies which required that, to the maximum extent possible, gold should be held in official reserves rather than go into private hoards. It was felt, however, that in view of widely different conditions in different countries, it was impracticable to expect all members to take uniform measures in order to achieve the objectives of the policy, and, accordingly, the Fund left to its members the practical operating decisions involved in the implementation of the policy. In reaching this decision, the Executive Board was aware that some members might take strong measures, others weaker measures, and yet others no measures at all. Each member was left to be the judge of just how and to what extent it would implement this statement.
The efforts made in recent years to check premium gold sales have illustrated the difficulties that almost invariably arise when the adoption of strict controls is not reinforced by appropriate economic policies. As long as the inducement to seek means of evasion remains, controls, even if they remain necessary, will become less and less effective with the passage of time. The only effective way of getting rid of premium gold markets and private hoarding of gold over a period of time is to create the economic conditions under which the demand for hoarding will become negligible. Insofar as the demand for gold is a function of confidence in the value of the currency, the best way to reduce the demand for hoarding gold is to adopt budget and credit policies that will restore or maintain this confidence. In some countries, gold hoarding is a matter of social tradition rather than a means of safeguarding against the risks of currency instability. These habits will not change quickly, but may gradually weaken with the spread of banking and the growth of financial institutions which may lead to a wider preference for bank deposits, securities, or investments in productive enterprises.
As indicated in the statement of September 28, 1951, the Fund will continue to watch developments in the field of premium prices and gold hoarding.
Subsequent to the decision of September 1951, several members have permitted their gold producers to engage in external transactions at premium prices, under certain specified conditions. Newly-mined gold from Canada, Australia, Southern Rhodesia, and the British Crown Colonies of Fiji, Kenya, Tanganyika, and West Africa can now be sold in various forms in premium markets against U.S. dollars. At first such sales were limited in Southern Rhodesia and the Crown Colonies to 40 per cent of new production, but, as from May 1, 1952, this limitation has been withdrawn. No quantitative limits have been placed on premium sales in Canada and Australia. In all these countries certain measures designed to reduce evasion of the gold regulations of the country of immediate destination have been adopted with varying degrees of effectiveness. Canadian producers that elect to sell gold at premium prices are not eligible for a subsidy under the Emergency Gold Mining Assistance Act which, after consultation with the Fund, was extended for a period of two years from January 1, 1952. The general framework of regulations that govern premium sales by South African producers has remained unchanged.
Premium Gold Prices
During the year under review, there was a general decline in gold prices in nearly all the premium markets. During the first nine months of 1951, prices generally were firm, but within a few days of the Fund’s policy statement in September there was a considerable decline. The price at which gold was traded in various markets directly for U.S. dollars dropped by almost $2 per ounce, and fluctuated between $38 and $39 per ounce. By April 30, 1952, it had declined further to about $37 per ounce.
U.S. dollar equivalent prices for bar gold in Bombay, Hong Kong, Paris, and other markets tended to follow the same general trend. A notable exception was Alexandria, where the price was slightly higher in April 1952 than in April 1951. The downward movement was particularly marked in Bombay, where, after a drastic price decline, the market was closed from March 4 to 18, 1952. There was subsequently a slight recovery, but at the end of April the Bombay price was still substantially lower than it had been a year earlier. Converted at the official rate of exchange, the price of gold per fine ounce in Bombay was $66.43 on April 13, 1951, $56.91 on February 28, 1952, $44.80 on March 15, 1952, and $53.06 on April 30, 1952. In Paris, the price of gold in terms of francs has fluctuated widely. Bullion was quoted at 490,000 francs per kilogram on July 2, 1951, at 633,000 francs on February 27, 1952, and at 511,000 francs on April 30. Converted into U.S. dollars at the parallel market franc-dollar rate, which has also fluctuated widely, this meant that the price of bullion per fine ounce was equivalent to $41.76 on July 2, 1951, $40.76 on February 27, 1952, and $39.24 on April 30, 1952.
Total world production of gold was smaller in 1951 than in 1950. This was the first year since 1945 in which there had not been a moderate increase. Valued at $35 per fine ounce, total output (excluding the U.S.S.R. and the countries associated with it) increased from approximately $736 million in 1945 to $844 million in 1950, but declined to approximately $826 million in 1951.
The largest absolute decline in 1951 was in the United States, where the trend of gold production since 1947 has been somewhat erratic. There was also a slight decline in the Union of South Africa and Canada. The largest relative decline was in Ecuador and Venezuela, where gold production came to a virtual stop during the year. Several other minor gold producers, including Colombia, the Philippine Republic, and the Belgian Congo, showed increases, though their output is still well below the prewar level.
On the whole the devaluations of September 1949 failed to stimulate the production of gold. Output in the sterling area was actually smaller in 1951 than in 1949, despite an increase of 44 per cent in the official price of gold. Additional revenue from premium sales in South Africa in 1951 was £6.7 million, more than three times the revenue in 1950, and representing an additional $1.70 (i.e., approximately 5 per cent of the official price) for every ounce produced. The record of premium sales in the early months of 1952 suggests, however, that this trend may not be maintained. Apart from the development of new mining properties in the Orange Free State, which have already begun production on a small scale, favorable price developments have not encouraged increased production in South Africa.
As a result of the uneven decline in gold production during World War II and the uneven recovery since 1945, there have been large shifts in the relative importance of the gold producing areas. Sterling area production increased from about 50 per cent of the world total before the war to nearly 60 per cent in 1951. Central American production increased from less than one half of one per cent of world production to almost one and one half per cent. On the other hand, the share of the United States declined from 13 per cent to about 8.5 per cent, and of Asia from 10 per cent to 4 per cent.
Gold Reserves and Private Holdings
A comparision between the volume of gold production in all countries outside the U.S.S.R. and its associates and the increase in the official gold holdings of these countries should indicate the extent to which their gold producers or their monetary authorities have made net sales of gold to industrial users, to private hoarders, or to the U.S.S.R. and its associates. There are, however, many imperfections in the data available for making this comparison, which nevertheless suggests that the amount of gold supplied for nonmonetary use and private hoarding was larger in 1951 than in any other postwar year.
The conditions that determine supply and demand in the premium market are still highly volatile and uncertain, and any prediction of the course of prices would be hazardous. Nevertheless, it seems certain that the recent decline in the premium price of gold has been due largely to the increased diversion to premium markets of newly-mined gold and, in a few cases, of gold held in official reserves. It can scarcely be regarded as a permanent solution of the problem to substitute for a market in which there was a small turnover at high prices one with a much larger turnover and, therefore, an increasing diversion of gold into private hoards, even if the price approximates more closely to the official price.
Gold Transactions Service
On March 21, 1952 the Fund informed its members that it was prepared to provide them with a regular technical service in connection with their gold transactions. On a few occasions in the past, when one member had wished to sell gold in a particular center and another to buy there, the Fund had been able to put the members in touch with each other, thereby facilitating a purchase and sale of gold with a saving of cost. It had been suggested by some members that the Fund might be able to perform this service more frequently by establishing a settled procedure.
In a letter of March 21, 1952 the Fund advised members of the details of such a procedure. Members intending to buy or sell gold and wishing to use the Fund’s service were requested to furnish the Fund with all necessary information, on a confidential basis, as far in advance as possible, and the Fund would then attempt to match intending buyers and sellers. For this service, the Fund would ask each partner in a completed transaction to pay a charge of 1/32 of one per cent in dollars. The Fund would pay the normal charges and out-of-pocket expenses of the gold depository which are incidental to the transfer of the gold from the seller’s account with that depository to the buyer’s account with that depository.
The extent to which gold transactions can be matched will depend not only upon the conditions of supply and demand, but also upon the number of members that avail themselves of the service and the time made available to the Fund for arranging a transaction. The Fund is willing to discuss with any member the manner in which it can avail itself of these facilities. The response to the Fund’s letter has indicated that many members are interested in the service, and use has already been made of it.