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."