An "Indecent" Question For Financiers

THE PRICE OF GOLD

ASKED about the possibility of a change in the 24-year-old price of gold, Britain's Prime Minister Harold Macmillan last week replied: "That is one of those questions it is even indecent to ask and still more improper to answer." Nevertheless, the question is rapidly becoming topic A in the world's financial capitals, and gold itself booms as a major new weapon in the trade war between East and West. The economic possibilities produced a speculative fever that is sweeping markets in London, Toronto and New York City, pushing many gold shares to new highs.

Part of the sudden interest is due to the U.S. recession. With price and production largely stabilized by governments, gold-mining companies always grow more attractive in periods of deflation. But far more intriguing to speculators is the hope that gold will be revalued for the first time since 1934, possibly rising from $35 per oz. to $50 or more. One of the main arguments for revaluation: the U.S. is losing some of its vast hoard of gold in what appears to be a flight from the dollar. In the last four months alone, foreign purchases have drained $1.2 billion from U.S. gold stocks. If the outflow continues at this rate, it will top $3.6 billion in 1958--a loss greater than in either 1949 or 1954.

One immediate effect of the drain is that it forced the Federal Reserve to ease bank reserves by $450 million last April to counteract the tightening effect on domestic bank reserves. A much more serious potential effect is on the stability of the U.S. dollar. The U.S. has total Treasury stocks of $21.6 billion, about 67% of the free world's supply of monetary gold. Since it needs only $11.4 billion to provide the legal 25% gold-backing for the Federal Reserve's notes and liabilities, the U.S. apparently has a comfortable $10 billion surplus. Actually, this surplus is illusory; foreign governments and individuals increased their holdings of various U.S. securities callable within one year to a total of $13.7 billion, which leaves the U.S. with a $3.5 billion "technical deficit."

Most experts scout the possibility of such a run. Foreign governments would demand gold only under conditions of imminent catastrophe. Much of the outflow, says George Willis, Treasury Director of International Finance, "is due to the normal recovery of Europe." Since 1950, Europe has doubled its gold reserves to $8 billion with big gains for Belgium, The Netherlands, West Germany.

The Treasury's view of normalcy is open to question. The switch from inflow to outflow coincided not with the "normal recovery of Europe" but with the U.S. recession. U.S. exports are down a sharp 25% this year, but imports are holding steady, causing a shift in the balance of trade. Some experts even see the accelerating conversion as a calculated campaign to force the U.S. into a price boost.

True or not, there is plenty of pressure from all sides. London's Economist calls for a 300% hike in the price of gold to bring it in line with other increases, and every miner hopes for a price boost to pay rising costs and improve profits. A more important argument for a higher gold price is that it will help foreign trade. Financial men argue that the world simply does not have enough gold. South Africa's W. J. Busschau, manager of the New Consolidated Gold Fields, Ltd. and one of the world's leading gold experts, argues persuasively that while the free-world money supply has increased fourfold since 1938, gold stocks are up only 40%. To make this comparatively small amount finance the growing volume of world trade, says Busschau, the price should be hiked, not just by the U.S. but by world agreement so that all currencies would remain the same in relation to one another.

The U.S. Government is against any such price boost, arguing that the main gainers would be large gold holders--the U.S., France, West Germany, Switzerland--while the losers would be the underdeveloped nations of the Middle East and Asia, which have enough trouble as it is earning hard currencies to buy gold.

The greatest gainer of all would be Soviet Russia, with production estimated as high as $600 million annually and gold stocks at $8 billion. Some experts, such as Manhattan's Franz Pick, expect the Reds to turn their gold into an economic weapon by using it to set up a gold-backed foreign trade ruble. Last week rumors flooded Wall Street that the Russians were up to precisely that. The advantages, said Pick, would be tremendous, since it would give the Russians a "respectable ruble" and make a sensational impression on underdeveloped countries.

Regardless of what the Russians do, the U.S. dollar is already getting its roughest ride in years. And it looked as if it would continue as long as foreign nations fear that a budget deficit estimated at $11 billion or more next year will bring on new inflation in the U.S. and inevitably cheapen the dollar.

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