The CIA Report on the Gold Market in 1972, the Year the U.S. Went Off the Gold Standard.

Classification of the CIA report drops from “Secret” to “Confidential”.

Focus on the decline of South African gold production and sales.

Soviet Union gold sales accelerated in 1972.

Grain Prices Skyrocket.

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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”.

U.S. Abandons the Gold Standard on August 15, 1971

The CIA memorandum analyzing the World Gold Market in 1972 was the first annual gold market memorandum they produced since the U.S. abandoned the gold standard the prior year. Given that gold was no longer part of the monetary system, it appears that the information contained in this memorandum was considered less sensitive, hence the lowered level of classification from “secret” to “confidential”. The memorandum was produced by the Office of Economic Research.

South African Gold Sales and Production in 1972

South Africa sold about 700 tons of gold in 1972, down from approximately 1,100 tons in 1971 and approximately 1,420 tons in 1970.

Soviet Union Sales of Gold in 1972

The Soviet Union sold about 150 tons of gold in 1972 (worth about $250-300 million). The CIA speculated the Soviet Union sold this gold to pay for grain purchases.

The Great Grain Robbery

Not noted in the document was the “Great Grain Robbery” that refers to the Soviet purchase of large amounts of grain from the United States at low prices. Grain prices soared soon after the Soviet grain purchase. Ironically, the CIA should have been focused on international grain prices and inventories as a matter of national security, rather than the gold market.

The CIA projected that the Soviets would probably sell a large amount of gold in 1973. Again, not mentioning that the US/Soviet agreement to buy grain was a three year deal and that the Soviets would need the cash to pay for the reduced priced US grain.

The Price of Gold In 1972

The CIA noted that the free market gold price reached a high of $70 an ounce before stabilizing around $64 an ounce.

Gold’s Use in Settling Transaction Slows to a Crawl

The CIA noted that non -IMF gold transactions since the closing of the gold window had slowed to a trickle and that the European Community had agreed to “dispense temporarily with gold settlements in official intra EC monetary transactions.

Gold Production in 1972

Global gold production fell in 1972 to 1450 tons from 1480 tons in 1971. South African gold production which at the time accounted for 62% of global gold production fell 8% in 1972 to 900 tons, while Soviet gold production increased 23% to about 270 tons. Both countries were selling gold at that time in amounts to meet their foreign exchange requirements. Russia sold gold to buy wheat and South Africa gold gold to meet its cumulative foreign payments. Because South African had a good harvest in 1972 its agricultural exports were larger and it needed to sell less gold to balance its payments.

Sales of gold by South Africa and the Soviet Union were handled by a Swiss consortium. The CIA noted that 75% of the gold traded on world markets was sold in Zurich Switzerland with the remainder in London.

Gold Demand in 1972

The higher price of gold in 1972 discouraged “gold hoarding for jewelry in the Far and Middle East- at the time noted as “traditional hoarders”.

Central Banks and Gold

There was continued demand by some central banks for the U.S. to reopen the gold window. In February 1972 the US devalued the dollar and the official (vs free market) price of gold was set at $38 an ounce. Despite the closing of the gold window, the CIA noted that “gold’s attraction as an official reserve asset has grown as the price has risen“.

“National officials consequently has sought to keep their gold reserves intact in times of payment difficulties”. The United Kingdom for example borrowed against it 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, Special Drawing Rights and foreign currencies.

EC Strain over Gold Payments

Italy got special permission to repay its intervention obligations in dollars, thereby preserving its gold reserves and the EC tentatively agreed to allow repayment in reserves other than gold by all members in 1973.

Price Outlook for 1973

The CIA projected that free market gold prices might fall to about $58 an ounce in 1973.

Further Reading and Listening:

BLEEDING GOLD RESERVES AT THE FASTEST PACE EVER, THE U.S. CLOSES THE GOLD WINDOW (The Year the United States sold 770 tons of gold) 1971

THE YEAR THE UNITED STATES SOLD OVER 700 TONS OF GOLD 1970

WHEN THE CIA SUSPECTED GOLD MARKET MANIPULATION 1969-70

The CIA and Gold – You Tube Playlist

Special thanks to Vijay @vijinho and @jameshenryand of JMBullion for alerting me to these documents.

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