Created: 5/1/1968

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Intelligence Memorandum


Competition for South African Gold

for release date:1




INTELLIGENCE AGENCY Directorate of Intelligence8


INTERNATIONAL FINANCE SERIESompetition for South African Gold

Sumna ry

The battle for domination of the new free gold markets has been joined. Two powerful private groups, one of whichombination of Swiss banks and theonsortium of international interests, are actively seeking exclusive control of the marketing of South African output, which accounts for aboutercent of all gold mined in the Free World. South Africa, in an attempt to push the price level higher, has refused to market gold for the past two months. While an immediate marketing channel is not at issue. South Africa will not be able to suspend gold sales indefinitely, since gold pays for aboutercent of its imports. South Africa can, however,old embargo for many months if it chooses to do so, at least through the remainder

If the marketing contest were restricted to these two private groups, the Swiss banking combine might well emerge victorious. However, the London bullion dealers may well enter the contest before South Africaarketing decision. Also, South Africa probably will avoid making an exclusive dealing commitment with any single group in order to preserve its own flexibility.

London bullion dealers represent the strongest potential rival to the Swiss group in the competition for control over purchases and resales of South African gold. Unless restrained by the Bank of England, they can be expected to enter the contest

Note: Thie memorandum uos produced solely by CIA. It aae prepared by the Office of Economic Research.

for now gold once South Africa is ready to resume salesargo scale. Paris dealers are not likel toajor force in the competition for South African gold unless the French government exerts pressure and provides subsidies to supportenture. Although rumors abound, there is no firm


structure of international goldboon in flux since, when theseven major central banks meeting into stop supplying gold to privatetheir reserves and, at least temporarily,purchasing privately held or newly mineddecision, in effect, established two one for monetary and another forgold transactions. Monetary gold continuestraded among central banks at the fixed priceper ounce, while producers, industrialand hoarders traderee marketdetermined by supply and demand.

the establishment of the newgold prices in the principal freebeen held downarge "overhang"illion) of bullion purchased during thecrises. Many speculators who boughtnow not willing to sell at prices yielding only

aain overer ounce purchase price, and liquidation has been slow.

3# Tho existence of the overhangemporary phenomenon, although its duration is uncertain. How long it will persist depends on threehe expectations of speculators on the extent of the price rise; the time required for industrial and artistic demand for gold, as well as purchases for long-term holdings in hoards, to absorb the excess supplies;he rate at which newly mined gold (and any gold froo official reserves) enters the market.

4. In these circumstances, the major suppliers have been reluctant to enter the market. The USSR, the world's second largest producer, has not been selling gold because it has currently no need for larger supplies of foreign currencies and prefers to build up its gold reserves. South Africa, whose annual output constitutes more thanercent of tho Free World's gold production, also has ceased exporting gold. The South African Finance Minister announced8 that South Africa would market no gold for the time being. Although gold normally pays for aboutercent of its imports.

South Africa can hold its gold production off the market for months without detrimental effects on its economy. Trade deficits have been coveredarge inflow of private foreign capital, and foreign bank credit is readily available if needed. Nevertheless, South Africa nay choose to resume gold sales at any time. esumption of South African gold sales, two private groupsone Swiss, the other internationalhave begun an intensescramble for major customers and for exclusive rights to sell South African gold*

The Swiss Group

5* Three of Switzerland's largest commercial banksthe Swiss Bank Corporation, the Swiss Credit Bank, and the Union Bank of Switzerlandhaveroup to manage the Zurich gold market and to acouire exclusive rights to sell South African gold. Even before the London gold market suspended operationswo-week period beginningarch, the Union Bank of Switzerland, acting for the group,epresentative to South Africa to negotiate arrangements for gold purchases and shipments. id was submitted to the Reserve Bank of South Africa onarch, but was turned down. Meanwhile, the Union Bank had instructed its representative in Johannesburg to obtain the personal assistance of officials in Union Acceptances,f Southinancial house with extensive contacts in the Reserve Bank. All these efforts failed.

The International Consortium

ompetitor entered onsortium consisting ofajor US trader andof gold. Union Acceptances,fa small Swiss financial house, adealer, and several individuals. Noneof the Swiss group, except Unionappears tooot in both camps attime.

consortium expressed its goalestablish itsolf as the sole outlet for South On the selling side, the consortium hopescontrol of the market for industrial anduses and then to supply speculative andfrom its surplus gold holdings.

major effort was made to persuadeAfricans that the consortium controlledthe industrial outlets in Europe and,it was uniquely suited to market allgold. The consortium did not possessof control it claimed, but it was maJcingand energetic effort to gain suchlaid plans to enter every available market with

a priceer ounce below that of tho lowest bidding competitor. The consortium probably was prepared to meet these commitments either with gold on hand or with gold newly purchasedigher price, the prospect of market control compensating for temporary losses that might be involved.

this point, the South Africansdispleasure with the absence of otherconsortium thereupon decided to haveenter the bidding individually to createof competition. Whether or not anyentered individual bids is not known. event no sale is known to have resulted.

Further Competitive Moves

During late March and early April, both groups engaged in active competition for the South African gold account. The Swiss group issued public statements claiming that the volume of goldon the Zurich market was largo and confidently predicting that Zurich would replace London as the principal international gold market. It continued to press this argument, without success,igh-level personal visit to the head ot the Reserve Dank of South Africa. Onarch, its representative was informed that no South African decision had yet been made. The continued failure of the Swiss group apparently was discovered quickly by the consortium. Indeed most moves of the Swiss group were made known to the consortium, probably by Union Acceptances. During the final week of March, the consortiumpresented its marketing proposals to officials of the Chamber ofrivate association that con-tols production and refining of gold in South Africa.

South Africa continued toecision. Then onarch, the Reserve Bank of South Africa requested both the Swiss group and the consortium to

place formal bids for about three tons of gold. On the same day, the Prime Minister announced that South Africa would sell gold on the free market, but he did not say when. Since no gold transactions are known to have resulted, the request for formal bids probablyentative probe by South African authorities to test the price expectations of major free market dealers. Indeed,pril the South African Prime Minister stated that his government would continue to withhold gold and would remain open-minded about future marketing arrangements. Thenepresentative of the Swiss banks reported from Johannesburgeetingigh official of the Reserve Dank of South Africa would resultecision (probably on gold sales through Zurich) the following day but that Zurich was to expectm until the end of May.

London and Paris

financial press has created thethat the contest for control of free goldin Western Europehree-way affairin Zurich, London, and Paris. Thedealers in each of these three citiesto conduct retail transactions inmarkets. But so far, only those in Zurichactively sought control of South Africanis essential to secure future control offunction for all markets in Western Europe.

almost seven8 the Bank of England, actingfor Gold Pool members and operatinggold dealers, controlled the wholesale During that period, the main suppliersUS Treasury and the South African Reservelost its control of wholesaling inwhen Gold Pool operations were abandonedof the two-tier market. The US Treasurysupplies gold to the free market. TheEngland, in support of the new system, hasits role of agent for South Africanleast for tho time being. So far, theon their own have not actively soughtcontrol of South African sales.

dealersay announced that,trading would be conducted throughout the

day rather than be limited to an hour or less as had been the practice for years. They also announced, however, that prices would be set.ell after the morning and afternoon "fixes" in London and after trends are established in Zurich. This time lag suggests that, at least for the present, they do not see Paris as the leading market in Western Europe. Moreover, the principal dealers in Paris, like those in London, have not actively sought control of South African sales.


The struggle between the Swiss group and the international consortium is likely to continue for at least as long as South Africa withholds the bulk of its supplies from the market. The Swiss group's three principal members are located in the same city and operate under the same liberal laws. Moreover, they have numerous active accounts and continuous market contacts. The international consortium is notoing concern and could not sustainoperationsarge scale unless it acquired substantial quantities of South African gold,

Unless they are restrained by the Bank of England, London bullion dealers can be expected to enter the contest for new gold once South Africaeadiness to resume salesarge scale. Possessing many advantages, the London dealers represent the strongest potential rival of the Swiss group. Their position would be even more formidable if the Bank of England reinstitutedwith the Union Castle Steamship Lines forbullion from Durban to London at exceptionally low rates. Moreover,ajor London dealer

ember of the international consortium, aof interest could quickly develop, combining the London dealers* cost advantage and thoaccess to major industrial users.

dealers are not likely to becomeforce in the competition for Southunless the French government exertsprovides whatever subsidies are needed toan effort. Although rumors abound, there isinformation that the French government,or without the Paris dealers, is so engaged.

Original document.

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