Key Events in the Gold Market in 1972.
World’s First Futures Market Opens in Winnipeg in November 1972.
Gold Hits Record $70 per Ounce.
Gold Remains an “Attractive Reserve Asset”.
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The State of the Gold Market in 1972 According to The CIA
CIA classification: SECRET
In our prior reviews of the CIA gold market reports covering 1969-71, we analyzed the “Secret” CIA memoranda. A classification of “secret” is just below “top secret” which could cause GRAVE damage and ahead of “confidential” that would “damage” national security if disclosed without proper authorization. Each of these CIA documents, long since declassified, came with the following warning.
Warning: This document contains information affecting the national defense of the United States, within the meaning of Title 18, sections 793 and 794, of the US Code as amended. Its transmission or revelation of its contents to or receipt by an unauthorized person is prohibited by law.
The document we are going to analyze today, “The World Gold Market in 1972 and Prospects for 1973 ” was marked “Confidential”.
Highlights
1972 was a transitional year in which the world’s monetary system reluctantly weaned itself off gold.
The Price of Gold in 1972
The free market price of gold reach a record $70 an ounce, a 100% increase from the official price of $35 an ounce. The increase in price was attributed to a 1/3 decrease in gold sales from non-Communist countries.
Gold Sales By South Africa and Russia
The CIA notes gold sales by South Africa and Russia, the two largest gold producers at the time were lower in 1972. South Africa sold less gold because its balance of payments improved. South Africa had been a very important geo-politically during the period of the Bretton Woods Agreements gold standard (1944-1971). Saudi Arabia would replace South Africa in importance in 1973-74, when oil instead of gold, would underpin the dollar.
The CIA noted that most gold producing countries at the time sold ALL their gold, whereas Russia and South Africa sold only enough to meet their balance of payments.
Higher gold prices curbed jewelry demand in 1972. While there was an increase in speculative gold buying in 1972, the CIA estimated that it only accounted for 5% of overall supply. The CIA concluded that the increase in the price of gold in 1972 was due to the decline in supply rather than an increase in demand.
After hitting a high of $70 an ounce on August 2, 1972, the price of gold stabilized the remainder of the year around $63-6 an ounce. The CIA expected that gold supply to increase slightly in 1973, mostly due to increased South African and Russian sales, which would probably drive the gold price down to $58 an ounce.
Gold remains attractive as a reserve asset as the price rise
Even though the U.S. gold window closed on August 15, 1971 and remained closed, foreign central banks continued to hold gold and some even pressured the U.S. to reopen the gold window. In February of 1972, the dollar was devalued and the official gold price increased from $35 an ounce to $38 an ounce.
The CIA noted that nationals have “sought to keep their gold reserves intact in times of payment difficulties”. “The United Kingdom, for example, borrowed against its non-gold reserves during the summer run on sterling rather than risk a portion of its gold reserves to support the pound. Italy threatened to drop out of the EC currency arrangement which among other things, called for a member state to repay debts arising from central bank intervention in the same proportion as its reserves in gold… Rome was persuaded to keep the lira in the EC band by receiving permission to repay intervention obligations in dollars.
U.S. Remains World’s Gold Broker
In a footnote the CIA noted, that although the US gold window remained closed, “the United States is still willing to sell gold to new IMF members needing gold to meet subscription requirements.”
Winnipeg opens world’s first gold futures market on November 15, 1972
“Gold is sold there for delivery to specific Canadian cities in January, April, July, October and up to one and a half years later”.
“Some observers expect that futures trading will remove some short-term speculative transactions from the more well-established markets. The relatively poor communications and the time difference between Winnipeg and other gold centers, however, and the high costs associated with initial trading will hold down the new market’s impact”
December 10, 1974 cable from Ronald Ian “Ron” Spier, Charge d’affairs and Deputy Chief of Mission:
THE BELIEF THAT THE FUTURES MARKET WOULD BE OF SIGNIFI-
CANT PROPORTION AND PHYSICAL TRADING WOULD BE MINISCULE BY
COMPARISON. ALSO EXPRESSED WAS THE EXPECTATION THAT LARGE
VOLUME FUTURES DEALING WOULD CREATE A HIGHLY VOLATILE MAR-
KET. IN TURN, THE VOLATILE PRICE MOVEMENTS WOULD DIMINISH
THE INITIAL DEMAND FOR PHYSICAL HOLDING AND MOST LIKELY
NEGATE LONG-TERM HOARDING BY U.S. CITIZENS.
The Future of Gold in the International Monetary System
“The role of gold in the new monetary system will be an important issue in international monetary reform negotiations… if and when overall monetary reform is achieved, it is almost certain that gold will play a less important role in the monetary system.
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Further Reading:
THE CIA AND GOLD (archives)
WHAT IS THE REAL PURPOSE OF THE GOLD FUTURES MARKET? – PODCAST
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