A Mystical Boom

Investors have concluded lately that most major currencies will lose much of their purchasing power in the months ahead. The doubts have set off a worldwide stampede to buy tangible commodities of all kinds: copper, silver, sugar, even potatoes. Most of all, the nervous are buying gold, a mystical symbol of eternal value. The price of gold rocketed up to a record $163 an ounce in London last week, almost double the quote a year ago, and up $23.50 in less than a month (see chart).

The gold rush is paradoxical for two reasons. Gold price leaps used to reflect primarily doubts about the worth of the dollar--but the dollar's price in foreign currencies has generally been climbing for the past several months. Also, the values of most major currencies are no longer formally tied to gold. But now investors are disturbed by forecasts that inflation will average close to 9% in the U.S. this year, 10% to 15% in Europe, as much as 20% in Japan. That means that paper currencies will buy steadily fewer goods and services, no matter what the price at which they can be exchanged for each other.

Now, gold is being purchased avidly by just about anyone with assets to protect: corporations, banks, Arab oil sheiks, offshore mutual funds, Germans who still remember the wallpaperization of their currency in the Weimar years, and French farmers.

Even American citizens are joining the rush. They cannot yet legally buy gold bars, but they have always been permitted to own gold coins. Sales of British sovereigns, Mexican 50-peso coins and good old double eagles (U.S. $20 gold pieces) are booming. In the past two weeks alone, double eagles traded in New York have gone from $200 apiece to nearly $300.

Some central bankers are showing renewed interest in gold, too, although it is supposed to be phased out of the world monetary system. Some government officials have suggested tripling or quadrupling the "official" $42.22 price of gold held by government banks; that might enable some nations to exchange gold for another costly commodity, imported oil. The U.S. opposes any move that would enhance the role of gold in international finance. If the Common Market countries raised the official price and the U.S. and other nations did not, the move might be interpreted in the markets as amounting to a devaluation of their currencies, although under the present rules of the monetary system it actually would not be. A Common Market revaluation of gold without agreement from other countries, however, would violate the rules of the International Monetary Fund.

Whatever happens to the official price, traders can see little that might bring the free-market price down soon. Production in South Africa, which mines most of the world's gold, has been declining in recent years as veins become played out--a trend that has helped keep the price up. Contrary to myth, however, gold purchasing is not without risk. The world supply available for trading is so small that the sudden sale of a few million dollars' worth could yet send the price plunging.

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