GOLD EXPORTS AND IMPORTS
CHAPTER VII
Gold exports and imports, while not constituting any great part of the activity of the average foreign department, are nevertheless a factor of vital importance in determining the movement of exchange. The loss of gold, in quantity, by some market may bring about money conditions resulting in very violent movements of exchange; or, on the other hand, such movements may be caused by the efforts of the controlling financial interests in some market to attract gold. The movement of exchange and the movement of gold are absolutely dependent one on the other.
Considering broadly this question of the movement of gold, it is to be borne in mind that by far the greater part of the world's production of the precious metal takes place in countries ranking very low as to banking importance. The United States, is indeed, the only first-class financial power in which any very considerable proportion of the world's gold is produced. Excepting the ninety million dollars of gold produced in the United States in 1908, nearly all of the total production of 430 million dollars for that year was taken out of the ground in places where there exists but the slightest demand for it for use in banking or the arts.
That being the case, it follows that there is to be considered, first, the primary movement of nearly all the gold produced—the movement from the mines to the great financial centers.
Considering that over half the gold taken out of the ground each year is mined in British possessions, it is only natural that London should be the greatest distributive point. Such is the case. Ownership of the mines which produce most of the world's gold is held in London, and so it is to the British capital that most of the world's gold comes after it has been taken out of the ground. By every steamer arriving from Australia and South Africa great quantities of the metal are carried to London, there to be disposed of at the best price available.
For raw gold, like raw copper or raw iron, has a price. Under the English banking law, it is true, the Bank of England must buy at the rate of seventy-seven shillings nine pence per ounce all the gold of standard (.916-2/3) fineness which may be offered it, but that establishes merely a minimum—there is no limit the other way to which the price of the metal may not be driven under sufficiently urgent bidding.
The distribution of the raw gold is effected as follows: Each Monday morning there is held an auction at which are present all the representatives of home or foreign banks who may be in the market for gold. These representatives, fully apprised of the amount of the metal which has arrived during the preceding week and which is to be sold, know exactly how much they can bid. The gold, therefore, is sold at the best possible price, and finds its way to that point where the greatest urgency of demand exists. It may be Paris or Berlin, or it may be the Bank of England. According as the representatives present at the auction may bid, the disposition of the gold is determined.
The primary disposition. For the fact that Berlin, for instance, obtains the bulk of the gold auctioned off on any given Monday by no means proves that the gold is going to remain for any length of time in Berlin. For some reason, in that particular case, the representatives of the German banks had been instructed to bid a price for the gold which would bring it to Berlin, but the conditions furnishing the motive for such a move may remain operative only a short time and the need for the metal pass away with them. Quarterly settlements in Berlin or the flotation of a Russian loan in Paris, for instance, might be enough to make the German and French banks' representatives go in and bid high enough to get the new gold, but with the passing of the quarter's end or the successful launching of the loan would pass the necessity for the gold, and its re-distribution would begin.
In other words, both the primary movement of gold from the mines and the secondary movement from the distributive centers are merely temporary and show little as to the final lodgment of the precious metal. What really counts is exchange conditions; it is along the lines of the favorable exchange that the great currents of gold will inevitably flow.
For example, if a draft for pounds sterling drawn on London can be bought here at a low rate of exchange, anything in London that the American consumer may want to possess himself of can be bought cheaper than when exchange on London is high. The price of a hat in London is, say, £1. With exchange at 4.83 it will cost a buyer in New York only $4.83 to buy that hat; if exchange were at 4.88, it would cost him $4.88. Similarly with raw copper or raw gold or any other commodity. Given a low rate of exchange on any point and it is possible for the outside markets to buy cheaply at that point.
And a very little difference in the price of exchange makes a very great difference so far as the price of gold is concerned. As stated in a previous chapter, a new gold sovereign at any United States assay office can be converted into $4.8665, so that if it cost nothing to bring a new sovereign over here, no one holding a draft for a pound (a sovereign is a gold pound) would sell it for less than $4.8665, but would simply order the sovereign sent over here and cash it in for $4.8665 himself. Always assuming that it cost nothing to bring over the actual gold, every time it became possible to buy a draft for less than $4.8665, some buyer would snatch at the chance.
Such a case, with £1 as the amount of the draft and the assumption of no charge for importing the gold, is, of course, mentioned merely for purposes of illustration. From it should, however, become clear the whole idea underlying gold imports. A new sovereign laid down in New York is worth, at any time, $4.8665. If it is possible to get the sovereign over here for less than that—by paying $4.83 for a £1 draft on London, for instance, and three cents for charges, $4.86 in all—it is possible to bring the sovereign in and make money doing it.
Whether the gold imported is in the form of sovereigns or whether it consists of bars makes not the slightest difference so far as the principle of the thing is concerned. A sovereign is at all times worth just so and so much at any United States assay office, and an ounce of gold of any given fineness is worth just so and so much, too, regardless of where it comes from. So that in importing gold, whether the metal be in the form of coin or bars, the great thing is the cheapness with which it can be secured in some foreign market. If it can be secured so cheaply in London, for example, that the price paid for each pound (sovereign) of the draft, plus the charge of bringing in each sovereign, is less than what the sovereign can be sold for when it gets here, it will pay to buy English gold and bring it in.
Exactly the same principle applies where the question is of importing gold bars instead of sovereigns, except that bars cannot be bought in London at a fixed rate. That, however, in no way affects the underlying principle that in importing gold the profit is made by selling the gold here for more dollars than the combined dollar-cost of the draft on London with which the gold is bought and the charges incurred in importing the metal. To illustrate, if the draft cost $997,000 and the charges amounted to $3,000, the gold (whether in the form of sovereigns, eagles or bars) would have to be sold here for at least $1,000,000, to have the importer come out even.
With exports, the theory of the thing is to sell a draft on, say, London, for more dollars than the dollar-cost of enough gold, plus charges, to meet the draft. As will be seen from the figures of an actual shipment, given further on, the banker who ships gold gets the money to buy the gold from the Treasury here, by selling a sterling draft on London. Suppose, for example, a New York banker wants to create a £200,000 balance in London. Figuring how many ounces of gold (at the buying price in London) will give him the £200,000 credit, he buys that much gold and sends it over. Suppose the combined cost of the gold and the charge for shipping it amounts to $976,000. If the banker here can sell a £200,000 draft against it at 4.88, he will just get back the $976,000 he laid out originally and be even on the transaction.
Before passing from the theory to the practice of gold exports and imports, there is to be considered the fact that bar gold sells in London at a constantly varying price, while in New York it sells at a definitely fixed price. In New York an ounce of gold of any given fineness can always be sold for the same amount of dollars and cents, but in London the amount of shillings and pence into which it is convertible varies constantly. So that a New York banker figuring on bringing in bar gold from London has to take carefully into account what the price per ounce of bar gold over there is. Sovereigns are seldom imported because they are secured in London not by weight but by face value,—even if the sovereigns have lost weight they cost just as many pounds sterling to secure. Where the New York banker is exporting gold, on the other hand, the price at which bar gold is selling in London is just as important as where he is importing. For the price at which the gold can be disposed of when it gets to London determines into how many pounds sterling it can be converted.
These matters of the cost of gold in one market and the crediting of the gold in some other market are not the easiest thing to grasp at first thought, but will perhaps become quite clear by reference to the accompanying calculation of actual gold export and gold import transactions. All the way through it must be remembered that the figures of such calculations can never be absolute—that insurance and freight charges vary and that different operations are conducted along different lines. The two operations described embody, however, the principle of both the outward and inward movement of bar gold at New York.
Export of Bars to London
In the transaction described below about a quarter of a million dollars' worth of bar gold is shipped to London, the money to pay for the gold being raised by the drawing and selling of a demand draft on London. Assuming that the draft is drawn and the gold shipped at the same time, the draft will be presented fully three days before the gold is credited, that being the time necessary for assaying, weighing, etc. In other words, there will be an "overdraft" for at least three days, interest on which will have to be figured as a part of the cost of the operation.
Following is the detailed statement:
| 13,195-1/2 ounces bar gold (.9166 fine) purchased from U.S. Treasury or Sub-Treasury at $18.9459 per ounce | | $250,000 |
| Assay office charge (4 cents per $100) | | 100 |
| Cartage and packing | | 20 |
| Freight (5/32 per cent.) | | 390 |
| Insurance (1/20 per cent.) | | 125 |
| Interest on overdraft in London (from time draft has to be paid until the gold is credited) 3 days at 4 per cent. | | 83 |
| Total expense of buying and shipping the gold | | $250,718 |
| 13,195-1/2 ounces of gold credited in London at 77 shillings 10-1/2 pence | £51,380 | |
| Draft on London for £51,380, sold by shipper of the gold, at 487.96 | | $250,718 |
In the transaction described above, the "overdraft" caused by the inevitable delay in assaying and weighing the gold on its arrival in London lasted for three days, the American banker being charged interest at the rate of four per cent. 487.96 being the rate at which the banker exporting the gold was able to sell his demand draft at the time, was, under those conditions, the "gold export point."
In this particular operation, which was undertaken purely for advertising purposes, the shipper of the gold came out exactly even. Suppose, however, that he had been able to sell his draft, against the gold shipped, at 4.88 instead of 4.87-3/4. That would have meant twenty-five points (one-quarter cent per pound) more, which, on £51,380, would have amounted to $128.25.
This question of the profit on gold exports is both interesting and, because it has a strong bearing at times on the question of whether or not to ship gold, important. No rule can be laid down as to what profit bankers expect to make on shipments. If, for instance, a banker owes £200,000 abroad himself and finds it cheaper to send gold than to buy a bill, the question of profit does not enter at all. Then, again, many and many an export transaction is induced by ulterior motives—it may be for the sake of advertising, or for stock market purposes, or because some correspondent abroad needs the gold and is willing to pay for it. Any one of these or many like reasons may explain the phenomenon, occasionally seen, of gold exports at a time when conditions plainly indicate that the exporter is shipping at a loss.
As a rule, however, when exchange is scarce and the demand so great that bankers who do not themselves owe money abroad see a chance to supply the demand for exchange by shipping gold and drawing drafts against it, the profit amounts to anywhere from $400 to $1,000 on each million dollars shipped—for less than the first amount named it is hardly worth while to go into the transaction at all; on the other hand, conditions have to be pretty much disordered to force exchange to a point where the larger amount named can be earned.
Import of Bars from London
Turning now to the discussion of the conditions under which gold is imported, it will appear from the following calculation that interest plays a much more important part in the case of gold imports than in the case of exports. With exports, as has been shown, the interest charge is merely on a three days' overdraft, but in the case of imports the banker who brings in the gold loses interest on it for the whole time it is in transit and for a day or two on each end, besides. A New York banker, carrying a large balance in London, for instance, orders his London correspondent to buy and ship him a certain amount of bar gold. This the London banker does, charging the cost of the metal, and all shipping charges, to the account of the New York banker. On the whole amount thus charged, therefore, the New York banker loses interest while the gold is afloat. Even after the gold arrives in New York, of course, the depleted balance abroad continues to draw less interest than formerly, but to make up for that the gold begins to earn interest as soon as it gets here.
The transaction given below is one which was made under the above conditions—the importer in New York had a good balance in London and ordered his London correspondent to buy and ship about $1,000,000 of gold, charging the cost and all expenses to his (the New York banker's) account. In this particular case the interest lost in London was at six per cent. and lasted for ten days.
| Cost in the London market of 52,782 ounces of gold (.9166 fine) at 77 shillings, 11-3/4 pence per ounce | | £205,795 |
| Freight (5/32 per cent.) | | 320 |
| Insurance | | 102 |
| Boxing and carting | | 9 |
| Commission for buying the gold | | 26 |
| Interest on cost of gold and on charges, while gold is in transit, 10 days at 6 per cent. | | 343 |
| | | £206,595 |
| Proceeds, at U.S. Sub-Treasury in New York, of the 52,782 ounces of gold at $18.9459 per ounce | $1,000,000 | |
| $1,000,000 invested in a cable on London at $484.04 | | £206,595 |
In the above calculation it will be seen that the proceeds of the gold imported were exactly enough to buy a cable on London sufficiently large to cancel the original outlay for the gold and the expenses incurred in shipping it over here. On the whole transaction the banker importing the gold came out exactly even; a trifle over 4.84 was the "gold import point" at the time.
In a general way it can be said that the profit made on gold import operations is less than where gold is exported. Banking houses big enough and strong enough to engage in business of this character are more apt to be on the constructive side of the market than on the other, and will frequently bring in gold at no profit to themselves, or even at a loss, in order to further their plans. It does happen, of course, that gold is sometimes shipped out for stock market effect, but the effect of gold exports is growing less and less. Gold imports, on the other hand, are always a stimulating factor and are good live stock market ammunition as well as a constructive argument regarding the price of investments in general.
Exports of Gold Bars to Paris—the "Triangular Operation"
Calculations have been given regarding the movement of bar gold between London and New York—what is ordinarily known as the "direct" movement. "Indirect" movements, however, have figured so prominently of recent years in the exchange market that at least one example ought perhaps to be given. Far and away the most important of such "indirect movements" are those in which gold is shipped from New York to Paris for the sake of creating a credit balance in London.
Before examining the actual figures of such an operation it may be well to glance at the theory of the thing. A New York banker, say, for any one of many different reasons, wants to create a credit balance in London. Examining exchange conditions, he finds that sterling drafts drawn on London are to be had relatively cheaper in Paris than in New York. In the natural course of exchange arbitrage the New York banker would therefore buy a draft on Paris and send it to his French correspondent with instruction to use it to buy a draft on London and to remit such draft to London for credit of his (the American banker's) account.
But exchange on Paris is not always plentiful in the New York market, and very likely the New York banker will find that if he wants to send anything to Paris he will have to send gold. Assume, then, that he finds conditions favorable and decides to thus transfer a couple of hundred thousand pounds to London by sending gold to Paris. The operation might work out as follows:
| Cost of 48,500 ounces of bar gold (.995 fine) at U.S. Sub-Treasury, New York, at $20.5684 per ounce | | $997,567 |
| Insurance (4-1/2 cents per $100) | | 450 |
| Freight (5/32 per cent.) | | 1,555 |
| Assay office charges (4 cents per $100) | | 400 |
| Cartage and packing | | 60 |
| Commission in Paris | | 250 |
| Interest from time gold is shipped from New York until draft on new credit in London can be safely drawn and sold, 6 daysat 2 per cent. | | 333 |
| | | $1,000,615 |
| The gold arrives in Paris and is bought by the Bank of France— | | |
| 48,500 ounces at fcs. 106.3705 per ounce, equals fcs. | 5,158,969 | |
| That amount of francs then invested in a check on London, and the check sent to London for credit of the American banker, fcs. 5,158,969 at 25 francs 10 centimes per £ | £205,536 | |
| New York banker sells his draft on London for £205,536 at 4.86832 | | $1,000,615 |
Conditions principally affecting the shipment of gold by the triangular operation, it will be seen from the above calculation, are the rate of exchange on London at New York, and the rate of exchange on London at Paris. The higher the rate at which the New York banker can sell his bills on London after the gold has been shipped, the more money he will make. The lower the rate at which his Paris agent can secure the drafts drawn on London, the greater the amount of pounds sterling which the gold will buy. High sterling exchange in New York and low sterling exchange in Paris are therefore the main features of the combination of circumstances which result in these "triangular operations."
Gold Shipments to Argentina
Of the many other ways in which gold moves, one way seems to be becoming so increasingly important that it is well worthy of attention. Reference is made to the shipment of gold from New York to the Argentine for account of English bankers who have debts to discharge there.
Owing to Argentine loans placed in the English market and to heavy exports of wheat, hides, and meat from Buenos Aires to London, there exists almost a chronic condition of indebtedness on the part of the London bankers to the bankers in the Argentine. Not offset by any corresponding imports, these conditions are putting Buenos Aires each year in a better and better condition to make heavy demands upon London for gold, demands which have recently grown to such an extent as to make serious inroads on the British banks' reserves. Unwilling to comply with this demand for gold, the powers in charge of the London market have on several occasions deliberately produced money conditions in London resulting in a shifting of the Argentine demand for gold upon New York. The means by which this has been accomplished has been the raising of the Bank of England rate to a point sufficiently high to make the dollar-exchange on New York fall. Able, then, to buy dollar-drafts on New York very cheaply, the London bankers send to New York large amounts of such drafts, with instructions that they be used to buy gold for shipment to the Argentine.
The very general confusion of mind regarding these operations in gold comes perhaps from the fact that they are constantly referred to as being a result of high exchange on London, at New York. Which is true, but a most misleading way of expressing the fact that low exchange on New York, at London, is the reason of the shipments. High sterling exchange at New York and low dollar-exchange at London are, of course, one and the same thing. But in this case, what counts is that dollar-exchange can be cheaply bought in London.
No attempt is made in this little work to cover the whole field of operations in gold, infinite in scope as they are and of every conceivable variety. But from the examples given above it ought to be possible to work out a fairly clear idea as to why gold exports and imports take place and as to what the conditions are which bring them about.
While not failing to realize the importance to the markets of the movement back and forth of great amounts of gold, it may nevertheless be said that from the standpoint of the foreign exchange business the importance of transactions in gold is very generally overestimated. Most dealers in foreign exchange steer clear of exporting or importing gold whenever they can, the business being practically all done by half-a-dozen firms and banks. As has been seen, the profit to be made is miserably small as a rule, while the trouble and risk are very considerable. Import operations, especially, tie up large amounts of ready capital and often throw the regular working of a foreign department out of gear for days and even weeks. There is considerable newspaper advertising to be had by being always among the first to ship or bring in gold, but there are a good many houses who do not want or need that kind of advertising. Some of the best and strongest banking houses in New York, indeed, make it a rule to have nothing to do with operations in gold one way or the other. Should they need drafts on the other side at a time when there are no drafts to be had, such houses prefer to let some one else do the gold-shipping and are willing to let the shipping house make its one-sixteenth of one per cent. or one-thirty-second of one per cent. in the rate of exchange it charges for the bills drawn against the gold.
Particular attention has been paid all through the foregoing chapter to the gold movement in its relation to the New York markets, the movement between foreign points being too big a subject to describe in a work of this kind. In general, however, it can be said that of the three great gold markets abroad, London is the only one which can in any sense be called "free." In Paris, the ability of the Bank of France to pay its notes in silver instead of gold makes it possible for the Bank of France to control the gold movement absolutely, while in Germany the paternalistic attitude of the government is so insistent that gold exports are rarely undertaken by bankers except with the full sanction of the governors of the Reichsbank.
It is a question, even, whether London makes good its boast of maintaining Europe's only "free" gold market. The new gold coming from the mines does, it is true, find its way to London, for the purpose of being auctioned off to the highest bidder, but as the kind of bids which can be made are governed so largely by arbitrary action on the part of the Bank of England, it is a question whether the gold auction can be said to be "free." Suppose, for instance, that the "Old Lady of Threadneedle Street" decides that enough gold has been taken by foreign bidders and that exports had better be checked. Instantly the bank rate goes up, making it harder for the representatives of the foreign banks to bid. Should the rise in the rate not be sufficient to affect the outside exchange on London, the Bank will probably resort to the further expedient of entering the auction for its own account and outbidding all others. Not having any shipping charges to pay on this gold it buys, the Bank is usually able to secure all the gold it wants—or, rather, to keep anybody else from securing it. The auction is open to all, it is true, but being at times conducted under such circumstances, is hardly a market which can be called "free."
If there is any "free" gold market in the world, indeed, it is to be found in the United States. All anybody who wants gold, in this country, has to do, is to go around to the nearest sub-treasury and get it. If the supply of bars is exhausted, the buyer may be disappointed, but that has nothing to do with any restriction on the market. The market for gold bars in the United States is at the Treasury and the various sub-treasuries, and as long as the prospective buyer has the legal tender to offer, he can buy the gold bars which may be on hand. And at a fixed price, regardless of how urgent the demand may be, who he is, or who else may be bidding. First come first served is the rule, and a rule which is observed as long as the bars hold out. After that, whoever still wants gold can take it in the form of coin.
How such conditions have worked out, so far as our gaining or losing gold is concerned, can be seen from the following table, introduced here for the purpose of giving a clear idea as to just where the United States has stood in the international movement of gold during the five-year period given below:
| | Exports of Gold from U.S. | Imports | Excess of Imports |
| 1913 | $77,762,622 | $69,194,025 | |
| 1912 | 57,328,348 | 48,936,500 | |
| 1911 | 22,509,653 | 73,607,013 | 51,097,360 |
| 1910 | 118,563,215 | 43,339,905 | |
| 1909 | 91,531,818 | 44,003,989 |
1 Excess of exports
In conclusion, it may be said that the prediction that as international financial relationships between banks are drawn closer, gold movements will tend to decrease, seem hardly to be borne out by the figures of the table given above. Banks here and banks abroad are working together in a way unknown ten or even five years ago, but as yet there are no signs of any lessening in the inward or outward movement of specie. More liberal granting of international credits, increased international loaning operations, far from putting an end to the physical movement of gold in large quantities,—these are influences tending to make gold move more freely than ever. The day of the treasure galleons is over, but in their place we have swift-moving steamers by which gold can be shifted from one point to another with safety and ease. Gold movements seem as though they were to play an important part in the markets for a good many years to come.
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