Facebook Twitter

ECONOMIC REFORMS IN E. BLOC, USSR MAY ELEVATE GOLD PRICES

SHARE ECONOMIC REFORMS IN E. BLOC, USSR MAY ELEVATE GOLD PRICES

Gold bugs, even though gold already has run up $50 per ounce in less than three months, your time may not yet be past. The price of gold could climb to $550 or higher during 1990 or 1991 because of economic reforms in the Soviet Union and the East bloc countries.

Less than 90 days ago gold was priced at $367 per troy ounce. At that time we felt that gold would climb to between $420 and $445 in 1990. That forecast was based on the possibility that the Soviet Union would back its ruined Ruble with gold and that Australian gold production would slow because of tax law changes.As forecast, gold did move up to $420, but in less than three months rather than the six to nine months we originally thought.

Enter the historic period of change underway in Eastern Europe. No one foresaw the blinding speed of reform in the Soviet Union, let alone the rest of Eastern Europe. And, like the bearish Soviet economy, Eastern Europe is an economic basket case, hence the motivation for today's dramatic changes.

Consider this: The East bloc countries, especially Hungary, Poland and Czechoslovakia, may consider adopting some of the same solutions as the Soviet Union and also go to a gold standard. Here's why.

In order to make any real and immediate progress the East bloc nations need a basis for foreign trade, and that means currency that is acceptable internationally. Typically this would be done by undertaking economic reform, but that would take years.

However, if the economically afflicted nations (EANs) were able to back their own currencies with the shiny stuff, then they immediately would have a hard, tradeable currency and a basis with which to build their economic reforms relatively quickly, perhaps in a few years rather than decades.

The big question is where they would get the gold with which to pull off this miracle.

"No one knows how much gold the bloc nations have, if any," said Jon Jonat, vice president for gold trading with Deak International in New York.

Whatever the East bloc does have could be supplemented with gold from the world's largest producer, the Soviet Union. Because the Soviets and the East bloc nations already have a functioning barter system (because all of their currencies are virtually worthless and have been so for years) the Soviets could trade gold, of which they have much, for some of the materials, products and services that the Soviets need from the East bloc.

It would be in the East bloc nation's interest to accept this concept because they would need the gold to prop up their own economic reforms. The Soviets would be helped because the East bloc countries still would be economically tied to Moscow or at least friendly, because the gold would be the fuel for the economies and reforms of the East bloc countries.

What makes this even more interesting is that it would be the private speculators in the West who would be picking up the tab. Here's how:

Even a hint of a movement toward a gold standard by the East bloc nations would raise the specter of reduced available gold supplies, thereby driving up the price. Thus any barter arrangement with the Soviets, tied to a gold standard, would immediately give the receivers of the gold an asset that would be gaining in value, because of increased scarcity.

The more gold the East bloc nations and the Soviets take out of circulation, the higher the price will go and the stronger the value of the assets and currencies of the gold standard nations.

Here's where the speculator comes in. Gold prices would be rising not because the East bloc nations were using more, but because they would be taking more gold out of circulation. It would be the Western speculator who would be driving up the price with his gold purchases.

On a practical level ". . . the Soviets already have enough gold of their own to support a gold standard," said Jonat, which would move gold prices higher as soon as it was announced. The Soviets could strengthen the East bloc countries by providing them with gold (in exchange for goods) in amounts equal to the appreciation of the value of existing and coming Soviet gold stockpiles.

As long as the Soviets kept supplying the East bloc with gold, the East bloc countries would continue to be dependent upon the Soviets for their new found economic growth and reform.

"Adopting a gold standard would be a great signal by the Soviets and the bloc of their intent for fiscal responsibility. It could substantially shorten the time necessary to restore public faith in their currencies and the ability of foreigners to do business in those countries with relative efficiency," said Paul McGonagle, senior vice president foreign lending for the First National Bank of Chicago.

"However, if they were to go to a gold standard, expect the system to be tested immediately," said McGonagle. "Individuals and companies will try to cash in their local currency for gold, just to see if it could be done. But then they would settle down, just like the bank run scene in `It's a Wonderful Life.' "