Bullion Break

One of the important advances in international relations this year is that the Western nations have surmounted their currency crises and, largely as a result of the French devaluation and German revaluation, entered a new period of monetary tranquillity. The world's confidence in the value of paper money is measured by the volatile free-market price of gold: the higher the price, the greater the doubts among investors as to the worth of currencies. Since, last month's upward revaluation of the West German mark, gold has dropped abruptly. From an early October level of $41.20 an oz., the price in London sank last week to as low as $37.75 an oz. The price break was the sharpest since private gold trading was freed from the $35-an-oz. official price of the metal in March 1968.

Hoarders have been unloading their accumulated holdings, and there are reports among bankers that the Soviets are selling gold in the West. For the first time in years, there is no significant speculation against any important European currency or the U.S. dollar.

Squeezing South Africa. The falling gold price puts South Africa in a particularly uncomfortable position. South African mines provide 77% of the non-Communist world's gold output, but as part of a 1968 pact, central banks agreed to stop buying the metal. That strategy was intended to force South Africa to sell all its gold on the free market, thus depressing the price. South Africa tried to break the embargo but found only Portugal and some Middle East sheikdoms willing to risk the wrath of the major monetary powers by purchasing newly mined gold.

Now South Africa's trade deficit is growing. The country must either sell more surplus gold to pay for imports or reduce them and invite domestic inflation. Some European bankers have been urging the U.S. to relax its opposition to South African gold sales for official reserves. Washington has rebuffed that idea, but last week Paul Volcker, Treasury Under Secretary for Monetary Affairs, suggested that if South African trade deficits grow to worrisome proportions, the country might instead sell some gold to the International Monetary Fund. After all, the IMF's main mission is to promote stability in the international monetary system. By allowing South Africa only a small official outlet for its metal and forcing it to make most of its sales on the private market, the U.S. obviously hopes to squeeze the private price of gold closer to the $35-an-oz. official level. So far that is just what is happening.

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