Lift for the Bullion Boom

A week of panic buying pushes prices to historic highs

A legion of financial matadors would have been needed to quell the stampede of gold bulls, who in five days of frantic trading last week boosted the price to nearly twice as high as it was only 21 months ago and three times as high as 38 months ago. In London, one frazzled trader termed the heated bidding "wild and irrational." It was no less so at the International Monetary Market in Chicago, where a record 31,591 contracts were posted on Thursday. Buyers also rushed for other precious metals. Silver approached $12 per oz., up from $6 at the beginning of the year.

Much of the buying was coming from oil-rich Arabs, who were trading incognito through German and Swiss banks and brokers. Like goldbugs everywhere, the Middle Eastern investors were anxious over political uncertainties, global inflation and the fluctuating fortunes of the dollar, though it had dropped only slightly by week's end. European investors as well were eagerly acquiring gold because energy-induced inflation has been weakening the value of even their own "hard" currencies. A binge of panic buying by Southeast Asian investors, worried about reports of heightened tensions between China and Viet Nam, further pushed up demand. Many big U.S. investors were also acquiring gold as a hedge.

The brisk trade has caused supplies to dwindle, bringing shortages that inflate prices even more. At the International Monetary Fund's regular monthly gold auction on Wednesday, there were bids for 1.6 million troy oz., but only 444,000 were available. The shortage has developed in part because the U.S. Treasury decided last May to cut its regular gold offerings to 750,000 oz., a 50% reduction. The supply gap could widen because the IMF gold auctions are scheduled to stop next May, the Soviets have reduced their sales to roughly two-thirds of last year's, and South African production has decreased by about 25% over the past decade.

Remarkably, almost half of the 1,000 tons of gold that the IMF and the U.S. Treasury have put on the market in the past five years has been scooped up by one buyer: West Germany's Dresdner Bank. And its drive into gold has been pressed by one man, Hans-Joachim Schreiber, 46, who was appointed to the bank's board of directors five years ago. His faith in the metal dates to his youth in postwar Germany, where, he recalls, "some people owed their survival to the possession of a few ounces of gold."

At the U.S. Treasury's auction late in August, Schreiber bid $301 per oz. for gold that had been selling the day before at $299; Dresdner acquired 720,000 of the 750,000 oz. that were on sale. Many competitors thought that Schreiber had paid too dearly, but as of last week Dresdner and its customers had earned more than $23 million on those transactions.

Some of the gold goes to the bank's own account, but most is for its clients. The Dresdner is rumored to be active as an agent for Middle Eastern investors, though much of the demand is from West German money managers. Schreiber advises them to keep one-quarter to one-third of their investments in gold.

Schreiber keeps tight control over his agents in Frankfurt, New York, London, Hong Kong and Singapore, contacting his team almost instantly to find out who is buying, where and why. Such intelligence enables the bank to be extremely precise in its own actions. Says Schreiber: "Even after we submit written bids, we usually adjust them by a few cents via Telex right down to the deadline." At the U.S. Treasury auction last month, Dresdner's bid came in just high enough to win, and a Swiss competitor's offer failed by only 20-c- per oz. One clear moral: private investors who hope to benefit from the bullion boom will have a hard time matching wits against the professionals.

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