Flight from the Dollar

As the Queen Elizabeth was loading in Manhattan last week, U.S. Customs officers were notified that an automobile about to be put aboard had a curious sag in the rear. Peering beneath, they found 340 lbs. of gold, worth $150,000, strapped under the fenders. They arrested the owner on charges of trying to smuggle the gold out of the U.S.

All over the world, gold smuggling has become a big business. In Hong Kong last week, British authorities seized $24,500 worth of smuggled gold on a plane from Manila. At London's airport three weeks ago, inspectors found an 18-year-old Indian girl with $5,600 worth hidden under her sari. In India, which bans gold imports without license, air smugglers were reported dropping gold by parachute and landing small gold-laden planes in remote clearings. This craze for gold was reflected in Wall Street last week where speculators snatched up gold-mining stocks (e.g., Dome and Homestake), giving them a rise of as much as 3 points. Despite the Treasury's denials, speculators were betting the official $35-an-ounce price of gold, frozen since 1934, would soon be raised.

Since the Korean war, there has been a tremendous increase in the world demand for gold. Last June, most of the free world, thanks largely to Marshall Plan funds, was close to stabilizing its currencies. Gold hoarders had begun to convert the hidden metal into hard currencies; the price of gold in both free and black markets had dropped close to the official $35 rate (TIME, June 19).

But war in Asia and U.S. inflation brought a flight from the dollar. By last week, the price of gold in free markets had soared to $42 in Paris, Zurich and Tangier, to $56 in Hong Kong, to $59 in Bombay. London's Economist estimated that in 1950 $720 million in gold (more than 85% of world production) had gone either into hiding or commercial use. Actually, much of the "commercial" gold (for jewelry, etc.) had gone to hoarders. The International Monetary Fund permits South Africa, world's biggest gold producer, to sell part of its production at a premium in such semi-fabricated "commercial" gold (e.g., "gold rope" for jewelers). But it can be quickly smelted down in places like Tangier or Zurich into the small, easily transported 2.2-lb. gold bars, which have become the world's favorite form of hoarding. In France alone, bankers estimated that more than $4.5 billion in gold was hidden away--equal to about one-fifth of the total left in Fort Knox.

Fort Knox's own reserves have been dwindling. A year ago they stood at $24.3 billion. By last week they had fallen by more than $2 billion. France, Britain and other countries, with an improved balance of trade, had drawn off much of it--a healthy development for world trade. But the Treasury and the Fund suspected that much of this gold had not gone to support currencies but to hoarders.

Though most of the world's free nations have abandoned the gold standard, the world itself has not. As long as U.S. inflation continues, the world will continue to devalue the U.S. dollar and increase the pressure to raise the price of gold.

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