Finance: Dollars from Heaven

For weeks, skeptics around the globe have been gambling that the U.S. Government was on the verge of devaluing the dollar by raising its official $35-an-ounce price for gold. Unconvinced by Administration statements that devaluation was out of the question, the speculators have been busily exchanging dollars for gold bullion or, as a second-best hedge, buying gold mine stocks. Then, last week, President Kennedy took advantage of the Telstar communications satellite to deliver a stern-faced warning, witnessed by millions of Europeans, that “those who speculate against the dollar are going to lose.” Next day, gold shares on the London Stock Exchange nosedived. The day after, the price of bullion on the London gold market followed suit (see chart).

Solemn Ritual. Though there are also free gold markets in Hong Kong, Paris and Zurich, most of the world’s bullion trading is done on the London market—and the pattern for world prices is set there. Every working day in solemn ritual, dark-suited representatives of the five London firms authorized by the British government to deal in bullion meet in a second-floor room of the House of Rothschild. Signaling any changes in their offers by raising tiny British flags, “the fixers” spend about ten minutes arriving at the opening bullion price for the day. Thereafter the price fluctuates according to orders received, but any really major swings are prevented by a U.S. guarantee to buy or sell as necessary to protect its pegged price for gold. Lately, the U.S. has been aided in its stabilization effort by a $250 million gold pool set up by Western Europe’s central banks—but London insiders insist that the recent rush of gold buying has left the pool heavily overdrawn.

The exact identity of the ultimate buyers of the bullion traded in London is carefully shrouded by the Swiss and British banks that act as front men in the transactions. But traditionally, bullion buyers fall into three categories: THE HOARDERS, who come mostly from France and the Middle East, where faith in paper currency is low. Hoarders are particularly common in India, where gold jewelry has long been regarded as the safest way to cache wealth.

THE INVESTORS, who include international tycoons, Eastern oil sheiks, large companies, and even some foundations. The investors all believe that at some future time—even though it may be years off—the price of gold will inevitably rise, presenting them with a huge profit on their bullion stocks.

THE SPECULATORS, who are of every nationality, are gambling on an early rise in gold prices and often buy their bullion through European banks that are willing to lend them 90% of the purchase price at around 5% annual interest. According to New York Monetary Expert Franz Pick, increasing numbers of U.S. citizens (who are forbidden by law to own bullion) are buying it through agents who hand-carry dollars to Europe, buy the bars, and deposit them in Swiss banks.

Chronic Affliction. How long will Kennedy’s Telstar warning continue to discourage the speculators? London dealers expect them to come back into the market any time. The continuing drain on U.S. gold reserves (which last week dropped $90 million to a 23-year low of $16.2 billion) is sure to revive the argument—much favored by the British press—that eventually the U.S. will have no choice but to raise its gold price. The worldwide market crash has made securities less attractive and gold more so as a repository for spare capital. And not least important, once a man catches gold fever he is apt to suffer from it for the rest of his life.