WORLD TRADE: The Flight of Gold

In the world’s money marts last week, all the talk, the worry and the news was about gold. The price of gold in London hit $35.25 ½ an ounce, highest since London’s free market reopened six years ago. The swelling demand for gold by the world’s bankers, as well as by private investors, reflected the troubled political state of the world and uncertainty over which way the U.S. economy—and thus the value of the dollar—is headed.

One of the big buyers last week was the Bank of Italy, flush with the dollars from Olympic Games’ tourists; it seemed to be hedging its bet against any further cheapening of the dollar. Other major purchasers were Middle Eastern residents, panicky over the Jordanian bombings, who were converting their currencies into the safest of all assets. The rising purchases and rising price sounded a new warning to the U.S. Treasury, which has been steadily losing gold for three years. This drain, as Chase Manhattan Bank Vice Chairman David Rockefeller said last week, though no cause for immediate alarm, is “perhaps the most serious international economic problem this country faces.”

If it continues, the rising price of gold may well increase its flight from the U.S. Until now, the sudden new demand for gold has been chiefly met by sales in London, since it has been cheaper to buy it there than in the U.S. While the U.S. always stands ready to sell gold for $35 an ounce, thus setting the “official” world price, purchasers who want to keep their gold abroad have usually found that service and shipping charges push the delivered price of U.S. gold up 25¢ to 30¢ an ounce over the London price. But last week’s rise brought the two prices about even. Any further rise will make U.S. gold cheaper, and increase shipments. However, no one expects the U.S. to change the basic price for gold.

A Good Thing? When big U.S. gold losses began three years ago, U.S. officials and foreign bankers regarded it as a good thing, a sign that the booming health of Europe had once more made trade with the U.S. a two-way street. Foreigners piled up trade balances in the U.S., which they often converted into gold. The trouble was that the U.S. was not selling enough goods abroad to balance U.S. outward flow of money on imports, capital expenditures abroad and foreign aid.

This year the U.S. had hoped to make a sharp cut in its balance-of-payments deficit, which ran as high as $3.8 billion last year. Last week it looked as if the 1960 deficit would be around $3 billion, instead of the goal of $2.5 billion or less. Coupled with this big deficit is a current factor, the slowing of the U.S. boom and the talk of recession, which has caused the Federal Reserve Board to ease credit.

As a result, foreigners began to turn their U.S. short-term holdings into gold to invest it at higher interest rates abroad. While the U.S. lost only $126 million worth of gold in the first six months, another $391 million has been lost since June. Last week another $50 million in gold left the U.S. The big question: How much more of these foreign credits will be converted into gold and taken away?

All told, foreign nations have about $21 billion in short-term claims against the U.S. (see chart). Theoretically, they could turn all these into gold. Since the country has only $18.9 billion in gold reserves, the lowest total in 20 years (some $11 billion of which is pledged to assure a minimum of 25¢ in gold backing for every dollar), they could clean out the vaults. Actually, no expert thinks there is the remotest chance of this happening. But what many an economist does worry about is the way in which these huge foreign claims may hamper the Federal Reserve Board should it try further antirecession actions. If credit is eased more and U.S. interest rates drop while the rates stay up abroad, the pace at which credits are turned into gold is bound to speed up sharply.

Sharp Watch. How much gold might the nation lose? Treasury experts estimate that only about $1 billion is restless money, but no one really knows. Foreign bankers are keeping a sharp watch on the U.S. economy. Few foreign economists see any real flight from the dollar. But if and when the FRB decides the time has come to take strong antirecession measures, it will find itself in a new position. It will no longer have the complete freedom it once had to push interest rates down in order to push business up. In doing so, it might further increase the worrisome outward flow of U.S. gold.