Chapter 6 Gold and Silver
- International Monetary Fund
- Published Date:
- September 1962
World production of gold, excluding output in the U.S.S.R. and countries associated with it, increased in 1961 by nearly 4 per cent, to a new postwar peak for the eighth consecutive year (Chart 9). The increase, of 1.3 million fine ounces, raised output to almost 35 million ounces. Valued at US$35 per fine ounce, output in 1961 was $1,220 million, compared with $1,175 million in 1960 and $1,125 million in 1959. The value in 1961 was about 66 per cent more than the postwar minimum of $736 million in 1945, and only about 4 per cent less than the all-time peak of $1,264 million attained in 1940.
Chart 9.Estimated Supply and Absorption of Gold, 1951-61
Output in the Republic of South Africa increased in 1961 by about 1.6 million ounces (the equivalent of $54.5 million), to 22.9 million ounces ($802.9 million), the highest figure ever recorded in South Africa and equal to about 66 per cent of world production (Table 20). It represented an increase of slightly more than 7 per cent over output in 1960, and was almost double the 1951 figure. Further increases may be expected as the new mines in the Orange Free State and on the Far West Rand develop. The second largest absolute increase in production in 1961 was recorded in Japan, where output rose by the equivalent of $1.4 million, to about $13.2 million. There was also an increase in Nicaragua, equivalent to $1 million, bringing total production in that country to $7.9 million. Last year’s production in Australia, India, and the Philippines was about the same as in 1960.
Output declined in most of the other gold producing countries. In Canada, the second largest gold producer outside the U.S.S.R. and countries associated with it, the value of output fell by the equivalent of $6.5 million, to $155 million, about 4 per cent less than in 1960, and substantially below the maximum of $188 million attained in 1941. In the United States, the third largest producer, the value fell by the equivalent of $5.8 million, to $53 million, 10 per cent less than in 1960 and about 69 per cent less than the maximum of $170 million reached in 1940. The value declined by the equivalents of $2.4 million in Ghana, $2.1 million in Mexico, and $1.9 million in Colombia.
Both in production and in profitability, the gold mining industry in South Africa established new records in 1961. Primarily as a result of the expansion of production in the new mines, the average grade of ore per ton milled rose gradually from 4.553 dwt. in 1956 to 6.142 dwt. in 1961. The total African labor strength increased to a total of 382,000 at the end of 1961, and the number of tons of ore milled was about 3 per cent higher than in 1960. The combined working profits from gold, uranium, and other products in 1961 rose to R 264.0 million, from R 254.6 million in 1960; and dividends paid by all producers of gold and uranium during 1961 increased to R 99.5 million, from R 93.9 million during the previous year. Although in 1961 the profitability of the gold mining industry in South Africa as a whole was greater than ever before, the productivity of the older marginal mines that have no higher grade ore to which to turn during periods of high costs is still a matter of great concern to the industry.
The gold mining industry elsewhere is also concerned about rising costs and declining production. Where possible, mines have shifted to the production of higher grade ore, but some mines have been unable to do this and some governments have found it necessary to render financial assistance to producers by means of tax reductions or direct subsidy schemes (pages 163-64, below).
The stock of gold held by the monetary authorities in the world is estimated to have increased during 1961 by about $605 million (Table 21), compared with increases of about $340 million in 1960, $695 million in 1959, $680 million in 1958, $705 million in 1957, and $230 million in 1951, the smallest increase in the postwar period. These figures exclude the holdings of the U.S.S.R. and 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 1961, world monetary gold reserves, thus defined, amounted to approximately $41.1 billion. The important shifts in the distribution of these reserves which took place in 1961 are discussed in Chapter 7.
|Consumption in industry and arts, and private hoarding|
|Total added to world monetary gold stock||695||340||605|
|IMF gold transactions Subscriptions||−1,201||−189||−72|
|Sales to countries||300||300||500|
|BIS and EPU/EF gold transactions|
|Total added to countries’ monetary gold stock||−202||178||832|
Russian sales of gold in Western Europe during 1961 have been estimated at $275 million. Since the value of gold output outside the U.S.S.R. was $1,220 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 $1,500 million. A comparison of these supplies with the estimated aggregate increase of about $605 million in official gold holdings suggests that in 1961 the equivalent of about $890 million was absorbed by private holders and the arts and industries, about $150 million less than in 1960.
During the twelve-year period January 1, 1950-December 31, 1961, an estimated $7.3 billion in gold was used in the arts and industries or disappeared into private hoards. This is equivalent to well over half the total supply, during the same period, of gold from new production outside the Soviet area and sales by the U.S.S.R. and countries associated with it. 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
During and since World War II, New York has been the principal center of the world for transactions in monetary gold by governments, central banks, and international financial institutions. It does not provide a gold market like London, Paris, and Zurich, where the price fluctuates from day to day, or where private purchases may be made for various purposes. It is the center through which the U.S. Treasury is prepared to buy gold for official monetary purposes in unlimited amounts at $34.9125 a fine ounce, and to sell it at $35.0875. In this way the world official price for gold has been kept stable since 1934. Many central banks, governments, and international financial institutions find it to their advantage to have a substantial portion of their gold reserves earmarked at the Federal Reserve Bank of New York, to meet their monetary requirements. Substantial movements in and out of these reserve accounts have been recorded over the years.
Of the total gold holdings of the monetary authorities of the world, excluding those of the U.S.S.R. and associated countries, $28.9 billion (70 per cent) was physically located in the United States at the end of 1961. Between the end of 1957 and 1961, the U.S. Treasury’s net sales of gold, principally to Western European countries, amounted to $5.9 billion. During the same period, gold held under earmark by the Federal Reserve Bank of New York for the account of foreign central banks and governments and international financial institutions rose by an equivalent amount, to a total of $11.9 billion. In addition to substantial purchases from, and sales to, the United States by foreign monetary authorities, there were other movements of gold in 1961 between foreign accounts as a result of gold transactions facilitated by the services of the Bank for International Settlements and of the Fund.
The Bank of England, with the cooperation of the U.S. Treasury and the central banks of continental European countries, was successful in preventing new upheavals in the London gold market during the year under review. The price of gold in London, which from October 19, 1960 through February 1, 1961 had exceeded $35 an ounce by more than 1 per cent, almost immediately thereafter fell and remained below $35.24 per fine ounce, the price at which it would be profitable to buy gold in New York for resale in London. Various developments helped to make this possible. The U.S. Treasury publicly indicated its general approval of intervention by the United Kingdom in the gold market, thus assuring the Bank of England that it could replenish in the United States its gold holdings which were reduced by sales on the London market. The virtual withdrawal of continental European central banks from purchasing gold on the London market for most of the period under review also had a considerable influence toward keeping the market under control. These two factors, together with the increased supplies to the market from the U.S.S.R. and from sales by U.S. residents, who were required by Executive Order to dispose of their gold holdings by June 1, 1961, facilitated the supervision by the Bank of England of the operations of the London bullion market.
During 1961, the United Kingdom imported gold worth $1,777.7 million, of which $756.2 million came from its own stock located in the United States, $714.5 million from the Republic of South Africa, $223.2 million from the U.S.S.R., and most of the remainder from other gold producing countries in the sterling area and from Canada. Exports from the United Kingdom amounted to $861.1 million, of which $308.2 million went to Switzerland, $154.9 million to France, $66.1 million to the Federal Republic of Germany, and $61.0 million to Italy. The excess of total imports over total exports left a net increase of $916.5 million in the gold stocks physically located in London.
The figures in the preceding paragraph represent actual shipments of gold to and from London during the year; they are not, of course, indicative of the turnover in the London market, which at the daily “fixing” is reported to have been some 5 per cent above that for 1960, while business outside the “fixing” was slightly less than in 1960. The main supplier of the market was the Bank of England, as agent for the sale of most of South African production and of substantial amounts on behalf of the Exchange Equalization Account.
The price of gold in London during the financial year ended April 30, 1962 was relatively stable when compared with the violent movements during the preceding year (Chart 10). The dollar price of gold (converted at the buying rate for dollars in London at the time of the daily fixing) remained below the U.S. selling price during May and June 1961, the minimum price for that period being $35.0561 a fine ounce on May 29. An abundant supply of gold on the market at that time (from sales by the United Kingdom, the U.S.S.R., and U.S. resident holders of gold) enabled several central banks in Western Europe to increase their gold holdings without the increase having any marked effect on the price of gold in London. In July, following the renewal of uncertainties over the international political situation and the stability of reserve currencies, the price of gold rose above the U.S. selling price, and the monthly average market price remained above this price through February 1962. The daily price reached a peak of $35.2019 on September 14, 1961 and remained close to this figure during October and much of November. Subsequently, it fluctuated between $35.1363 on December 27, 1961 and $35.1684 on January 19, 1962. A sharp decline in hoarding and speculative demand, together with the abstention of European central banks from the market at a time when supplies were increased by active selling on the part of an undisclosed source, caused the price to fall ½ cent below the U.S. selling price on February 23, 1962. Later, it declined further, to $35.0710 on April 5, and was quoted at $35.0725 on April 30.
Chart 10.Price of Gold in London Market, Monthly Averages, March 1954-April 1962
During the year under review, the sterling price of gold fluctuated between a maximum of 252s. 4½d. a fine ounce on July 21, 1961 and a three-year minimum of 249s. 1¼d. on March 13, 1962. At the end of April, it was quoted at 249s. 5½d.
While changes in normal market factors of supply and demand were mainly responsible for the lower level of gold prices, the extension of international financial cooperation to the London gold market also added to the stability of gold prices. The understanding between central banks participating in the “Basle arrangements” has been of an informal character, subject to change from time to time as circumstances warrant. Important elements in this cooperative approach included the avoidance of competitive buying, and the supply of gold to the market in certain circumstances.
Sales by South Africa
During 1961 a total of 2,505 bars of gold, weighing 1,010,000 fine ounces, were sold by the South African Reserve Bank to buyers resident outside the sterling area. Early in February 1962, the Republic of South Africa announced a decision, in response to an approach made by “financial circles abroad,” to export a “test consignment” of South African two-rand gold pieces. It was said that larger quantities of these coins would be sold later on the foreign market if the experiment were successful.
In other markets where bar gold is traded directly for U.S. dollars, the prices deviated very little from the London dollar price during the period under review. In markets where gold is traded in local currencies (Table 22), the prices in general tended to move in the same direction as those in the London market, even though in these markets the day-to-day movements of the U.S. dollar equivalent prices may diverge from those of the London prices because of exchange rate fluctuations and the special characteristics of each market.
|End of||End of||End of||End of||End of||End of|
|Apr. 1961||Apr. 1962||Apr. 1961||Apr. 1962||Apr. 1961||Apr. 1962|
The price of gold coins in most free markets continued the general upward trend that had begun in mid-1960, reaching in January 1962 the highest premiums over the value of bar gold that have been recorded in recent years. In Paris, for example, the price of the napoleon rose from the equivalent of $40.86 a fine ounce (15 per cent premium over bar gold on May 2, 1961) to $47.32 (31 per cent premium on January 18, 1962), the highest figure since August 1957. Parallel with the decline in the price of bar gold, the price of gold coins in most markets declined in the latter part of February 1962; and in Paris the napoleon was quoted at the equivalent of $43.73 a fine ounce on March 30, 1962.
As a result of the increased demand for gold coins, more than 3 million sovereigns were exported from the United Kingdom in 1961.
Gold Transactions Service
Since the inauguration of the Fund’s gold transactions service in March 1952, the central banks of 25 member countries and 5 international organizations have purchased or sold gold through the facilities provided by the Fund. During the year under review, the completion of 5 transactions amounting to a total of about $27 million was facilitated by the Fund. Since March 1952 there have been 119 transactions, amounting to about $1,083 million.
Changes in National Policies Affecting Gold
Pursuant to the Foreign Trade and Payments Law of April 28, 1961, which came into force on September 1, 1961, there are now no restrictions in the Federal Republic of Germany on gold transactions between residents and nonresidents or on the export and import of gold. The import of gold originating from any one of the countries in the Soviet area, however, requires a special license.
It was announced by the central bank of Iran in December 1961 that the import of gold into Iran, except by the central bank itself, was prohibited.
The Government of Hungary has minted gold coins in denominations of 500, 100, and 50 forints in commemoration of the 150th anniversary of the birth of Franz Liszt and the 80th anniversary of the birth of Bela Bartók.
Gold Subsidy Programs
The gold subsidy programs of the Governments of Australia, Canada, and Colombia, discussed in previous Annual Reports, were still in operation during the past year. In October 1961, Australia consulted the Fund with regard to a modification of its system of gold subsidies, designed to remove inequities which had arisen because of the previous sharp distinction between “small” and “large” producers. The modification makes it possible for those “large producers” whose annual output is more than 500 but not more than 1,075 ounces to become eligible, if they so elect, for payment of a flat-rate subsidy irrespective of costs and profits. The rate of subsidy that is payable to such producers diminishes from £A 2 8s. Od. an ounce at an annual output of 500 ounces to nil at an annual output of 1,076 ounces. The amendment involves no change in the basic structure of the subsidy scheme described in the Fund’s Annual Reports for 1955, 1958, and 1960, which has been extended to June 30, 1965.
In June 1961, the Philippine Republic reintroduced direct subsidies to gold producers. All producers were classified into two categories—marginal and overmarginal—depending on whether or not their net profits fell short of “base profits,” which are calculated separately for each mine. In order to be eligible for the subsidy, gold producers are required to sell their entire output to the Central Bank at the official price, which is defined as the peso equivalent of US$35 an ounce or other price set by the Government. The maximum subsidy, in addition to the official price, is ₱ 65 an ounce for marginal producers and ₱ 50 an ounce for overmarginal producers. However, the total amount received is not to exceed ₱ 170 an ounce for marginal producers and ₱ 155 an ounce for overmarginal producers.1 These arrangements replaced others by which subsidies were given to gold producers through the exchange system.2 The Fund deemed the modified system of Australia and the new arrangements adopted by the Philippines to be consistent with the objectives of the Fund’s statement of December 11, 1947 on gold subsidies.3
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 proposed.
The directive of the President of the United States on November 28, 1961 to the U.S. Treasury to suspend further sales of free (nonmonetary) silver to industrial and artistic users at 91 cents an ounce, and to suspend its use for coinage, is of major significance to silver-producing countries and to world silver markets. The price of silver immediately rose, in London to 84½d. an ounce and in New York to $1.00¾. Subsequently, the price continued upward, reaching $1.04¾ in New York on December 15, and remaining unchanged there for the rest of the calendar year. In London the price rose on December 19 and 20 to 88¾d., the highest price since 1920. In mid-February, the price in the New York market declined to $1.02 an ounce, because more silver was offered (chiefly by producers) than could be absorbed. At the same time it was quoted in London at 85¼d.
The decision to suspend sales of free silver was precipitated by the decline of the U.S. Treasury’s holdings of free silver, from a peak supply of 222 million ounces in April 1959 to about 22 million ounces in November 1961. Although total Treasury holdings of silver were 3,349 million ounces at the close of 1961, all but the free silver was required for the backing of the silver certificates and for use in silver coins. Because the remaining amount of free silver was so small, the Presidential directive of November 1961 also specified that silver required to meet coinage needs should be obtained by the retirement from circulation of a sufficient number of $5 and $10 silver certificates.
In addition to the foregoing measures, the President announced that he would request the Congress to repeal the Silver Purchase Acts of 1934, 1939, and 1946, and to authorize the Federal Reserve Banks to replace $1 and $2 silver certificates with Federal Reserve notes. “These actions,” stated the President, “will permit the establishment of a broad market for trading in silver on a current and forward basis, comparable to the markets in which other commodities are traded. Our new policy will, in effect, provide for the eventual demonetization of silver except for its use in subsidiary coinage.” As this Report is written, the resulting bills are pending before the appropriate committees of the present session of Congress.
World consumption of silver for industrial and artistic uses and for coinage purposes has expanded greatly; in recent years, it has been well in excess of world production. Average annual consumption since 1959 has been estimated at more than 300 million ounces, and current production at about 235 million ounces. The shortfall in production has been met by offerings of demonetized silver from Mainland China and other sources, as well as by sales from the U.S. Treasury’s stock of free silver.
On June 30, 1962, the approximate dollar equivalents of these four figures were $17, $13, $44, and $40, respectively.
Annual Report, 1958, page 144.
Annual Report, 1948, pages 79-80.