Chapter 8 Gold
- International Monetary Fund
- Published Date:
- September 1961
WORLD production of gold, excluding output in the U.S.S.R. and countries associated with it, increased in 1960 to a new postwar peak for the seventh consecutive year (Chart 4). The increase, of about 1.5 million fine ounces, brought output to 33.5 million ounces. The value, at US$35 per fine ounce, was $1,175 million, compared with $1,125 million in 1959 and $1,049 million in 1958. Production in 1960 was about 60 per cent more than the lowest postwar total, in 1945, but about 7 per cent (2.5 million ounces) less than the all-time peak of about 36.1 million ounces, valued at $1,264 million, attained in 1940.
Chart 4.Estimated Supply and Absorption of Gold, 1951-60
In most gold producing countries output declined drastically during World War II, and only in South Africa and Ghana has the output attained in 1940 been achieved again. High and increasing production costs continue to be of major concern to the industry. Where possible, mines have shifted from the production of lower grade to higher grade ore; some mines are unable to do this and have had difficulty in maintaining a reasonable margin of profit.
In South Africa, however, the working costs per ton milled did not rise much during the past few years, and the year 1960 was the most profitable in the history of the industry. Output expanded in 1960 by 1.3 million ounces ($46.3 million), to about 21.4 million ounces ($748.4 million), the highest figure ever recorded in the Union and equal to almost 64 per cent of world production. Production in the Transvaal has been well maintained, but the largest rate of increase continues to be recorded by the new mines in the Orange Free State, where the grade of ore is higher than elsewhere. These mines first produced appreciable quantities in 1956; as a result of the expansion of production there and in the West Witwatersrand, the average grade of ore per ton milled in the Union has since risen from 4.553 dwt., to 5.865 dwt. in 1960.
For the first time since 1957 there was a net decrease in the total native labor strength, from 355,000 at the end of 1959 to 354,000 at the end of 1960. The number of tons of ore milled in the Union was, however, about 1 per cent more than in 1959. As the average working costs per ounce of ore recovered declined by 4s. 5d., to 158s. Od. in 1960, the average working profit from gold per ton milled rose from 24s. 7d. in 1959 to 27s. 8d. in 1960. (It had been 14s. 4d. in 1956.) The combined working profits from gold, uranium, and other products, £127.3 million, were 11 per cent greater than in 1959. However, of the 55 producers that are members of the Transvaal and Orange Free State Chamber of Mines, the working costs of 31 were higher, and the profits of 28 were smaller, than in 1959.
The increased profitability of South African gold mining and the high dividend yields on gold shares have followed, and in turn encouraged, new investment in the industry in recent years. But political unrest during 1960 caused a substantial outflow of capital. The South African gold shares index, after attaining a peak of 94.8 in June 1959, dropped to 62.6 in August 1960; it rose again during the London bullion market boom in October-November, but declined to 63.5 toward the end of March 1961.
In Canada, the second largest gold producing country outside the U.S.S.R. and the countries associated with it, the value of total output increased in 1960 by $4.2 million, to $161.1 million. This was a new postwar peak, but was substantially below the maximum of $187.7 million attained in 1941. In the United States, the third largest producer, the value amounted to about $57 million, the same as in 1959. This figure compares with a postwar peak of $80.1 million in 1950 and a maximum of $170 million in 1940. An increase of $1.3 million was recorded in Colombia.
The gold subsidy programs of the Governments of Australia, Canada, Colombia, and Fiji, discussed in previous Annual Reports, were still in operation during the past fiscal year of the Fund. In June 1960, Canada consulted the Fund with regard to extending the application of its Emergency Gold Mining Assistance Act to the years 1961, 1962, and 1963. It sought also to make certain changes in the administration of the Act, so as to ensure the fulfillment of the Government’s policy of making subsidy payments only on gold bullion sold to the Royal Canadian Mint. This amendment involves no change in the basic formula of the subsidy or in the rate of assistance.1 The Fund deemed these changes to be consistent with the objectives of the Fund’s statement of December 11, 1947 on gold subsidies. Fund members considering the introduction of subsidy schemes to prevent the reduction of output of gold, as well as those desiring to amend existing programs, have an obligation to consult with the Fund on the measures to be introduced.
The stock of gold held by the monetary authorities in the world is estimated to have increased during 1960 by about $340 million, compared with increases of about $695 million in 1959, $670 million in 1958, $705 million in 1957, and $220 million, the smallest increase in the postwar period, in 1951. These figures exclude the holdings of the U.S.S.R. and the countries associated with it, but include those of the International Monetary Fund, the Bank for International Settlements, and the European Fund, established under the European Monetary Agreement. At the end of 1960, world monetary gold reserves, thus defined, amounted to approximately $40.5 billion. The important shifts in the distribution of these reserves which took place in 1960 are discussed in Chapter 6.
Russian sales of gold in Western Europe during 1960 have been estimated at $200 million. Since the value of last year’s gold output outside the U.S.S.R. was $1,175 million, the total increase in the amount of gold available to the rest of the world may be estimated as being of the order of $1,375 million. A comparison of these supplies with the estimated aggregate increase of about $340 million in official gold holdings suggests that in 1960 the equivalent of about $1 billion was absorbed by private holders and the arts and industries, about $350 million more than in 1959 (Chart 4). In the last quarter of 1960, when private purchases of gold were of a magnitude around $450-475 million, there was an actual decline in official gold reserves, for the first time in any quarter since 1951. These private purchases are also discussed below in connection with the London gold market.
The diversion of gold to private holders is of great concern to the monetary authorities of the world. Even with the improvements that have taken place in the reserve strength of many countries, it is still in the best interest of Fund members that, as far as possible, gold should be channeled into official reserves rather than into private hoards. Only as gold is held in official reserves can it be used by monetary authorities to maintain stability of exchange rates and to meet balance of payments needs.
Gold Markets and Prices
The London Market
The economic and financial recovery of continental European countries and the adoption of external convertibility for sterling by the United Kingdom at the end of 1958 have contributed to the expansion of the bullion business of the London market. The main supplier of that market has been the Bank of England, as agent in the sale of about three fourths of South African production. During 1960 the United Kingdom imported gold worth $928.1 million, of which $106.5 million came from the U.S.S.R., $598.9 million from the Union of South Africa, and most of the remainder from other gold producing countries in the sterling area and from Canada. Exports from the United Kingdom amounted to $736.6 million, leaving a net increase of $191.5 million in the gold stocks physically located in London. These figures, however, give no indication of the turnover in the London market. That market is open to private interests, but, except for licensed domestic users, only residents of non-sterling countries may buy gold there.
During the financial year ended April 30, 1961, the price of gold in London reached the highest level since the reopening of the market in March 1954 (Chart 5). The average monthly dollar price remained above the U.S. selling price of $35.0875 per fine ounce for the entire period May 1960 through February 1961. The dollar price (converted at the sterling-dollar rate at the time of daily “fixing”) increased from $35.0875 per fine ounce on May 27, 1960 (the minimum for the month) to $35.3818 on October 19, 1960. Once the margin of 1 per cent above parity prescribed by the Fund had been exceeded, the central banks of Fund members were precluded from buying gold in London. This position prevailed through February 1961. On October 20, 1960, the price at “fixing” was equivalent to $36.5495, but eager bidding for small supplies pushed the price up to about $40 during the day; at closing, it was about $38. On October 25, the price at “fixing” was $37.9863, the highest price at “fixing” since the reopening of the London market. By the end of the month, it had declined to $36.0281. The downward trend continued, and on February 23, 1961 the price was $35.0720—below the U.S. selling price for the first time since June 1960. The minimum for the financial year was $35.0603 on March 23, 1961. At the end of April 1961, the price was equivalent to $35.0794.
Chart 5.Price of Gold in London Market, Monthly Averages, March 1954-April 1961
During October 1960, the private demand for gold was active from all centers, and the flow of gold into the hands of hoarders and speculators far exceeded production during that period. The demand coincided with an unusually large outflow of short-term capital from the United States. It has been attributed to various factors, including the belief that the price of gold would be increased. A further influence was exerted by measures taken in Germany and Switzerland to restrict the inflow of foreign funds and speculative dealings. Several developments acted to reduce this abnormal demand for gold. The U.S. Treasury publicly indicated its general approval of intervention by the United Kingdom in the gold market. A U.S. Executive Order dated January 14, 1961 prohibited the purchase and holding of gold outside the United States by U.S. private citizens and U.S.-owned corporations, and required U.S. residents to sell their present holdings of gold or securities representing gold on deposit by June 1, 1961. The President, in a Message to Congress on February 6, 1961, firmly declared that the U.S. dollar would not be devalued and outlined the measures which would be taken to improve the balance of payments position. At the same time, as was indicated in Chapter 6, the basic balance of payments position of the United States continued to strengthen.
The prices at which bar gold is traded directly for U.S. dollars in other markets deviated by only a few cents from the London dollar price during the year under review (Table 18). In markets where gold is traded in local currencies, the day-to-day movements of the U.S. dollar equivalent prices often diverge from the movements of London prices because of exchange rate fluctuations and the special characteristics of each market. In general, however, prices in these markets followed the same pattern as those in the London market, tending to move upward when the price of gold in London rose and down when it declined. In the markets for gold coins, the prices of the sovereign and the napoleon showed a general increase that began in the early part of the fiscal year, reversing the downward trend of the three previous years.
During the past year, several countries took measures to relax restrictions on the sale of gold and on the movement of gold through their territories. In Israel, trade in gold was liberalized by an Order of the Controller of Foreign Exchange. Under the new regulations, effective in November 1960, Israeli residents are permitted to deposit their gold holdings with authorized foreign exchange dealers against certificates which can be sold to other persons. (Previously, purchases and sales of gold were limited to authorized dealers in foreign exchange. Other individuals could hold gold but were not permitted to transfer ownership or possession.) Persons who deposit gold with a foreign exchange dealer may also export such gold through the authorized dealer against foreign currency; the proceeds are credited to a foreign exchange account. Israeli residents are also entitled to import gold against payment from a foreign exchange account. Persons who are not owners of foreign exchange accounts may acquire such accounts by purchasing and reselling foreign securities.
In Sweden, the Sveriges Riksbank removed, in August 1960, some restrictions on the purchasing of gold by the general public. The public may now buy from goldsmiths gold objects without upper limits of weight or purity, and imports and exports of gold objects are virtually free of restrictions. However, exports and imports of gold in bars, plates, and tubes are still subject to control, and domestic sales of gold in bars or other raw or semifinished forms are not permitted.
In the Netherlands, the Twentsche Bank announced in November 1960 that it had ordered 3,605 gold ducats to be made at the state mint, to be offered for sale at f. 27.50 each. Each ducat contains about 3.494 grams of gold. This was the first time since 1937 that the bank had offered gold coins for sale.
In Hong Kong, the board of directors of the gold and silver exchange in October 1960 raised the margin requirements for trading in gold and U.S. dollars. The margin for each tael of gold was raised from HK$ 12.50 to HK$20.50, and for each unit of US$1,000 the margin was raised from HK$200 to HK$400.
In the Union of South Africa, sales of 400-ounce gold bars to overseas buyers under the scheme introduced by the South African Reserve Bank in April 1959 1 totaled $192.5 million in 1960. In the same year, sales of kilogram gold bars to approved buyers outside the sterling area, under a scheme initiated in June 1959 by the Transvaal and Orange Free State Chamber of Mines, 2 amounted to $12.1 million. The minimum price realized for these transactions was 249s. 6½d. a fine ounce, and the maximum price was 259s. 0½d. The total amount of these sales represents about 27 per cent of South Africa’s production in 1960.
See Annual Report, 1959, page 149-50
See Annual Report, 1959, page 157.
See Annual Report, 1960, page 151.