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.