STATE OF BUSINESS: The Gold Rush

“Gold fever!” cried the London Daily Express. For a change, the fever-pitched Express was not exaggerating. In a stampede of investors and speculators anxious to exchange U.S. dollars for bullion, gold prices took off last week on their most spectacular rise since London’s gold exchange reopened in 1954. Starting at just over $35.25 an ounce (about the same as the U.S. price of $35 an ounce, with transportation and insurance added), gold prices broke free of their old ceiling at week’s beginning, jumped to $35.65 for the biggest one-day advance in the exchange’s history—then the next day rushed up a spectacular $5 to almost $41.

The same kind of frenzy was upsetting other gold markets. Hong Kong’s gold and silver exchange closed down trading after gold soared as high as $46.64 an ounce, and speculators bid as high as $49.38 on the black market. Gold trading on the Paris Bourse more than doubled. The Johannesburg stock exchange had its greatest activity in gold shares since the pound was devalued in 1949. and the Johannesburg Star headlined: DOLLAR VALUE ON FREE MARKET: 76¢. Stocks in gold-mining companies soared.

Rumors & Recommendations. European Central banks, usually the biggest gold buyers, did little of the buying this time; the prices were too high. Beginning with private buyers and investors who wanted to convert their paper currencies to gold, the market soon surrendered to speculators who saw the chance of making a fast killing. Much of the buying was triggered by Swiss bankers, who have been recommending a switch from dollars and other paper currencies to gold. The Swiss angrily denied that they were responsible for the gold rush, said the buying was chiefly for their foreign clients. A large block of buying also came from the U.S. itself, where a number of investment advisory services have been recommending gold purchases.

The cause of the gold rush was the growing feeling in European financial circles that the U.S. dollar is weakening, is perhaps headed for eventual devaluation. The European bankers are concerned about the unfavorable U.S. balance of trade and about the possibility of a U.S. recession, which they feel would sharply lower interest rates and cause a further rise in U.S. gold outflow (U.S. gold stocks dipped another $33 million—to an $875 million total dip since January—in the last reported week). The bankers were also reported anticipating and fearing a Kennedy victory, and concluding that his policies might lead to inflation and to devaluing the dollar (a suspicion that Kennedy’s press office called ”wholly and categorically untrue”).

No Crutches. Europe’s Central banks could have prevented the sharp gold rise by selling enough gold to fatten the thin market, since transactions in London amounted to only $25 million daily. But that would have meant purchasing gold from the U.S. Treasury to cover the sales, and thus worsening the U.S. gold outflow —a step the U.S. did not encourage. Some Swiss bankers criticized the U.S. Treasury for lacking the courage to stop the price rise, felt that Treasury could have saved the situation quickly by the dramatic gesture of sending U.S.-held gold to Europe to loosen the tight market. But Treasury officials felt that any indication that the dollar needed crutches was bound to hurt more than help in the long run.

Treasury’s course was to announce firmly that there would be no change in the U.S. price for gold. The announcement had the desired effect: at week’s end gold prices fell back—to $37.22 in London—and steadied. But since gold prices still stood at a level at which Central banks could buy from the U.S. and sell elsewhere at a profit, most bankers expected that the storm had not yet blown over.