Created: 6/1/1968

OCR scan of the original document, errors are possible



Intelligence Memorandum

International Finance Series, No. 2

Prospects for Resumption of South African Gold Sales



Cop> N2



This memorandum is the seconderies of


the series was ER,

tompettCion for South African Gold.

CENTRAL INTELLIGENCE AGENCY Directorate of Intelligence June8


Prospects for Resumption of South African Gold Sales


There is no firm evidence that South Africa has yet sold gold since the two-tier market wasin mid-March, although it is actively probing central banks and international monetary institutions, including the IMF, to find outlets. While South Africa has the economic capability to maintain its embargo wellt will sell gold if it can findthat it considers attractive.

South Africa would prefer to have the option of selling on either the official marketn ounce or the free market, hopefullyigher price. This arrangement would permit South Africa to maximize revenue from gold sales by choosing the market that yielded the better return. At the present time the official market comprised of major central banks probably will not take newly mined gold, and the free market price is threatened by the overhang of more than S2 billion bought by speculators since the sterling devaluation in South Africa's withdrawal from the market thus appears to be primarily defensive. urther marked deterioration of the international monetary system, however, might encourage South Africa to play for higher stakes, holding its gold off the marketonsiderable period in hopesermanent increase in the official price.

Note: This memorandum uas produced solely by CIA. It uas prepared by the Office of Economic Research.

Normally, South Africa must sell gold in order to cover deficits in its balance of payments. Durin tho four, gold sales financed aboutercent of total imports, and during the same period accumulated balance of-paymcnts deficits amounted toillion. In the first quarterouth Africa's balance of payments improved appreciably in spite of only minimal gold sales because of an improved trade balance and the inflow of0 million in foreign exchange, much of which was used to purchase shares of gold mining stock on the South African stock exchange. South Africaurplus6 million in its balance of payments in the first quarter. This surplus should nearly cover the expected deficit in the second quarter. After mid-year, however, deficits of0 million per quarter will necessitate either borrowing or the sale of gold.

If South Africa decided to borrow money abroad to meet current needs, it could probably refrain from selling gold through the remainder of the year and beyond. This would necessitate borrowing0 million0 million abroad by the end of the year. In view of its mounting gold reserves, which totaled an0 million by the end of May and would in the absence of sales amount toillion by the end of the year. South Africa should have little difficulty obtaining loans of this size.


South Africa's current production of more than SI billion of gold annually amounts to aboutercent of the world total and tof the supply of now gold outside the USSR. South African gold sales of almostillion during the last ten years have been equivalent in value toercent of South Africa's merchandise exports during the period and toercent of the country's merchandise. (see

South Africa normally exports almost all its gold production!xports wereillion monthly. 8old sales kept pace with thepercent growth

of manufacturing output, rising6 million toillion. In the last two years, however, gold production has stabilized at slightly over SIear and is expected to begin to decline in the0 'a, unless South Africa can sell its gold for moren ounce.

Africa has normally maintained aon current account by means of gold sales. last four years, however, importseficit on merchandise tradeto an average6 million apayments, which in South. on imports, remained well aheadreceipts,7ear toaccount deficit. Gold sales, averaginga year, financed part of tho deficit,spite of earnings ofillion from gold, on current account9 million ranging from as much2 million illion Surpluses onresulting from an inflow of capital intosector began in5 and in the lasthave largely offset deficits on currentthe, the surplus9 million,et deficit

* urther dra'-Xioon oforeign exchange reserves of0 million occurredesult of the devaluation of sterling and certain other awrenoier. in

in the balance of payments for the period ofillion (see*

Table 1

South Africa: Annual Balance of Payments a/

Million US S


. Gold sales Service receipts Merchandise. Service payments Transfers

3 1 48

2 5 57

8 91

on current account


capital movements

in gold and foreign exchange reserves

Beoauee of rounding, compon* shown.




4. By and largo. South Africa has beenin its international economic relations, generallyavorable balance of payments. The foreign debt has averaged5 million over the last ten years and was reduced9 million South Africa's Reserve Bank's gold holdings fluctuated0 million8ow6 million at the time of the Sharpesville incidenthen there was an extraordinary outflow of capital. Gold reserves recovered rapidly, however,4 million by the end3 because of large surpluses on current account. Reserves


declined slightly in the following two years but recovered again6 as the balance of trade improved and foreign capital was attracted by investment opportunities. An increase of more0 million in importsowever, reduced gold reserves8 million at the end Hard currency reserves have fluctuated0 million, standing2 million at the end of7 (see

Recent Developments

Africa's reaction to thecrisis, which began with the devaluationinas first to reducesales and then to withdraw from the marketDecember's sales were lessormal levels, and in January and8

a total ofillion was soldless than one-half the normal rate. Sales, if any, in the first half of March have not been reported, and no gold has been sold abroad since mid-March when the two-tier market was established.

Africa has been able to withholdoutput from the market without strain, principally because of anin the trade balance and heavy capital the firsc quarter of During theof this year, imports declinedhe first quarter The declineownward trend that began following an unusually high level ofthealf of the year thatndustrial and commercial inventories. Thein the second half7 occurred inclasses "machinery and transport"manufactured goods"ownturn in

the investment cycle,eduction of consumer liquidity,ecrease in the growth rate of economic activity in general. Also, in the first quarter food imports declined as the resultood harvest. There is no evidence that the decline in imports has any direct relationship to the international monetary crisis .

exports, which rose by almost continued their upward trend inquarterhen they wereercent

above the first quarter of the previous year. Most of the increase was due to improved harvests and livestock exports. Service receipts were also up as the result of the increased use of South Africa's port facilities, since tho closure of the Suez Canal, by ships rounding the Cape of Good Hope. Service payments have been held down somewhat by the reduction in commodity imports (see

gold sales during the8 were0 million below thetha deficit on current accountillion. The deficit onamounted to1 million, andexceeded service receiptsalesillion in the first two months

of the year and net transfersillion reduced the deficit to5 million total.

Africa had no difficulty financingon current account without resort tobecauseassive capital inflow ofmillion in the private sector during Much of these fundi* were used to buy

gold mining shares on the South African stock exchange, raising the total capital inflow during the first quarter8 in the private sector to an0 nillion. This was reduced only slightly by an outflow ofillion from the central government and the banking sector, et surplus on the capital account of about0 million. esult, there was an increase of0 million in foreign exchange reserves.

The withholding of allillion of gold production from the market in the first quarter8 million to gold reserves, raising them frommillion at the close of7t the end of March. By the end of May, gold reserves probably0 million.

Thus the South African economy has been little affected by the gold crisis. The decline in imports has been duo to other causes and would have occurred in any event. Gold production hatsas usual so that incomes generated in gold mining have not changed, and all gold has been purchased by the South African Reserve Bank in the

normal way. The absonce of gold exports has not been inflationary, because there was no difficulty financing imports, and gold production has gone into the government account and has not beenfor credit expansion. The main monetaryfor South Africa during the gold crisis has been the influx of foreign capital to buy gold shares. This influx does add to bank reserves and is therefore potentially inflationary. Since South Africa's control of inflationary forces in the economy in recent years has been quite effective, the effects of this inflow appear to be manageable.


South Africa's gold policy is not yet clear. It has made efforts to market its gold to central banks and international monetary institutions, such as the International Monetary Fund, but has remained largely unresponsive to efforts of the free market. The few inquiries South Africa has made as tofor free market sales have been very discreet and have involved small amounts that would notthe market.

South Africa appears able to hold its gold off the world market for months without having to make any significant adjustment in its domestic economy, its foreign currency reserves were adequate to cover orp nearly cover deficits through June. From now on, 'deficits will have to be covered by borrowing unless there continues to be an unusually large capital inflow. Depending on the capital inflow and onew cyclicalin investment resumes, borrowing needs could amount to as little as0 million0 million or as much0 million0 million during the second half There seems to be no question as to South Africa's ability to obtain this much credit, or more. South Africa isan excellent credit risk, and if it does not sell gold, its gold reserves would exceed one and one-half billion dollars at the end

South African Policy Options

fact that South Africa can refraingold does not mean that it will do so.will depend on its assessmentfor the international monetary system, the

possibilities of an increase in the official price of gold,he supply and demand for gold in the free market. At the present time. South Africa fears that its resumption of sales might prompt speculators who bought more thanillion in gold following devaluation of sterling in7 to dump their holdings on the market. Such anof large quantities of gold could drive the free market pricen ounce.

Africa would prefer to have theselling on either the official marketor on the free market, hopefully at a This arrangement would permit Southmaximize revenue from gold sales by choosing

the market that yielded the better return. But if the official market continues to refuse to buy newly mined gold and the dollar remains strong. South Africa will eventually enter the free market. As time passes, industry and hoarders will absorb the overhang held by short-term speculators and the market will strengthen. In addition, small amounts might be bought by the Bank for International Settlement.

however, the internationalintensifies (for example, because of acrisis or the' failure of US measuresthe dollarouth Africa mayit can force an increase in the officialgold by refraining from any sales at all. If

it should decide on this course, it probably could continue to withhold gold well9 ifby borrowing abroad with relatively minor interest costs.

Table 2

South Africa: Annual Balance of FaynwntB

Killion LB

9 0 ? ^ 5 6 7 (


Current Account








fwiaoce of Payment* hi

U3 t


Hiiro: Second Third fourth

Quarter ftusrtf r ^blaj ft-inrt-r Quarter Quarter Quarter total



f iUynenta

IB t





oM mIm Servicec-rtmllaeaytenls











i aervleea (net reeelpta 0


(net receipts *)

on current acsouat

Mm menu

sector Central goverrMntWilcfl aeclor






cspllal mirorntg

(net Inflow ')

In gold ori!clon

sector Includeilllan Influx ofcapital uocdo goldhares; to

tlla la added tUr. thaf IS. ncmal inrlnw.

T". tOe faurlft ^airUr 7 arefor alllien, larenta.

Inljalrr.heoilifluree ti"re a,

repor ted >

e. Mare ettJra'.ed a'.In the last tCree of All 'trer lteiaestmtidtfteol tfiemartvr

t. All item areat Ih.J67-

Table 5

South Africa: Gold and Foreign Exchange ReservesThroughay


End of Period Total Gold Reserves Foreign Exchange Reserves




Data are for the Beeeroe Bank only, and therefore changes in gold and foreign exchange reserves differ from thoee in Table 1. Because of rounding, components may not add to the totals shown.

Original document.

Comment about this article or add new information about this topic: