Where the Gold Has Gone

For months, international moneymen have been trying to solve a nagging mystery: What could South Africa be doing with the enormous quantities of gold --77% of the non-Communist world's output--that it mines? The question is much more than an intellectual game for economists. It involves such practical matters as the future of the South African economy, the value of the U.S. dollar and the whole intricate mechanism of international gold trading.

South Africa badly needs to sell gold to pay for its imports; but other nations have not been buying its bullion for their monetary reserves since 1968, when the U.S. persuaded central bankers to join a boycott. That move was part of a power play intended to blunt South Africa's campaign for an increase in the price of gold. U.S. officials hoped to force South Africa to dump its gold on free markets in London and Switzerland and thus drive the free-market price down to the $35-per-ounce level that prevails in deals between governments. The boycott apparently had little effect. South Africa has obviously not been dumping gold on the free markets, because prices in London and Switzerland have remained about $40 per ounce.

Even so, South Africa has been selling somewhere. South African Reserve Bank statistics show that just about all of the $560 million worth of gold that the country has mined so far this year has been sent abroad.

Pride and Profit. TIME'S European Economic Correspondent Robert Ball has pieced together an explanation. Most of the gold, Ball reports, has been flown to Switzerland and bought by three banks: Credit Suisse, Union Bank and Swiss Bank Corp. Motivated by pride and profit, the three banks formed a syndicate a year ago and began to buy newly mined South African gold. They wanted Zurich to challenge London's position as the leading gold market, and they also figured to sell the gold at a lucrative markup. By carefully controlling their marketing practices, they could keep the free-market price from becoming depressed. They sold the gold to industrial users, private hoarders and speculators--but only when demand was strong enough to make the deal pay off. Indeed, when the free-market price weakened slightly last month, the three Swiss banks bought more gold in London to help prop it up.

The syndicate, however, has been unable to take all the gold that South Africa has offered. The Bank of Portugal has broken the central-bank boycott and bought some of the rest at the official $35 price. The Lisbon bankers took about $145 million worth in 1968 and another $120 million worth early this year. Johannesburg moneymen also believe that South Africa has loaned some gold to other African nations.

Compromise Talk. In addition, central bankers strongly suspect that South Africa has deposited some of its gold in foreign banks and subtracted the deposits from its figures on gold reserves. That ploy would tend to make the boycott look even more ineffective than it is. British statistics show that $222 million in South African gold entered the U.K. last year. Most of it is probably to be found in South Africa's account at the Bank of England, which does not divulge what it is holding--but which has received South African gold ever since that country's first mines were dug.

Although it is partially beating the boycott, South Africa needs to sell even more gold to pay for its foreign purchases. Its officials have begun informal talks with the U.S. for some kind of compromise. Under one plan previously proposed by the U.S., South Africa would sell all of its gold in free markets but could sell some to central banks at $35 if the free-market price dropped to that level or below.

Johannesburg bankers imply that as part of any such compromise ending to the boycott, South Africa would drop its insistence that the official $35 price be raised and the dollar thereby devalued. Any agreement would probably be denounced by political liberals in the U.S. as unconscionable aid to one of the world's most racist nations. But a deal that would dissipate doubts about the integrity of the dollar would obviously help the U.S. too.

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