The Glitter That Is Gold

Bullion's latest boom spurs a purchasing panic and another dollar slide

Gold fever, the most infectious of monetary diseases during times of perceived economic distress and uncertainty, is epidemic. From Zurich to Chicago, from London to Hong Kong, goldbugs are scurrying once again to buy into their favorite hedge against disaster. With people battered by inflation and recession, worried about oil and lacking confidence in leaders and cures, the gold rush of '79 has turned into a stampede as schoolboys, housewives and pensioners have jumped in along with big investors. It is a surge that bodes little good for late-coming, small investors, the fragile international monetary system, the dollar and even some national economies.

The latest frenzy was heightened last week when so many bids were presented at Washington's monthly bullion auction that the U.S. Treasury could have sold four times the 750,000 oz. it offered. That, along with rumors of especially heavy orders for gold from buyers in the Middle East, stirred a wave of panic buying that pushed the price of bullion up by a record $24 an oz. in just one day. Trading was so hectic that the normal 500-an-oz. spread between buying and selling prices widened at times to $5. Gold hit an all-time high of $380 in London before slipping back at week's end to $369--up nearly $40 in just 14 days and a staggering $164 in twelve months.

Much of the buying was done by speculators who had earlier bet that gold would fall, and now had to run to buy to cover their short positions. At the same time, two events added to doubts that Western policymakers would come to grips effectively with their common economic problems. In Paris the finance ministers and central bankers of the Big Five monetary powers--Germany, Japan, France, Britain and the U.S.--failed to end a potentially damaging interest rate war among them. And the International Monetary Fund issued a gloomy study predicting a worsening economic outlook.

Fears that OPEC oil prices would rise and supplies would tighten also helped speed the rush to bullion, as did the perceived political weakness of Jimmy Carter and the threat of a challenge from Edward Kennedy. Some European dealers are calling the gold surge a "Kennedy rally" because it has been spurred by expectations that his free-spending, liberal policies might exacerbate U.S. inflation if he were elected. In the thin, highly volatile market, that distant worry is enough for a big rise.

After Carter's belated move to shore up the battered dollar in November 1978, the Administration showed little concern about the gold boom. As long as gold buyers were not singling out dollars for heavy selling, the fever was viewed as a monetary nonevent. But this complacency faded rapidly late last week when the greenback plunged 2% in just one day against the West German mark, to the lowest it has been since last October. The weakness caught Washington unprepared. Said one Treasury official: "There simply isn't the mental horsepower in the White House to deal with this kind of problem. They are preoccupied with Ham Jordan snorting coke."

If the gold frenzy continues to weaken the buck, OPEC might again move to lift its dollar-denominated price of oil sharply. Uncertainty over just what the greenback will be worth in months ahead would slow much trade that is negotiated in dollars. Beyond that, economists disagree about whether gold itself poses any threat. Many believe, as Economist John Maynard Keynes said, that gold is just a "barbarous relic," a commodity like pork bellies that should have no more monetary impact than wampum beads. Yet in this real world, the bullion boom could ultimately prove highly inflationary.

Most countries have gold stocks.

Though some compute the value of their hoards at less than market prices, any rise in those prices does lift the amount of a nation's reserves. Says Economist Robert Triffin, an international monetary expert: "Central banks now hold on their books assets that are ten times as valuable as they were in 1969. They can theoretically use these assets." In effect, wealth can be created out of nothing: the gold can either be sold to cover trade deficits or borrowed against to buy oil.

At the same time, the rise creates a new gap between rich and poor countries.

The industrial nations have the biggest bullion stocks, in terms of tons and also as a percentage of total reserves, so they gain most from a gold boom; the poorer states, with relatively meager holdings, benefit much less. Says an official at the British Ministry of Overseas Development: "We have a new category of haves and havenots. The Less Developed Countries, as usual, are suffering the most."

Prices of other precious metals such as platinum and palladium have also soared, as have those of diamonds, pearls, stamps, art and antiques. In the past month silver has risen 65%, while gold has gone up 23%, partly because its relatively low price per ounce attracts speculators. The popularity of such tangible assets reflects a fast-deepening distrust of all paper currencies in a period of scary inflation. For some extreme pessimists, the phenomenon has raised the specter of the Weimar era in Germany in the early 1920s, when wheelbarrow loads of notes were needed to buy a loaf of bread. Essentially, the price of gold is an index of anxiety and a barometer of fears that, justified or not, seem too real to many.

A cure for the gold plague will not be easy to find. It is even difficult to tell just who is buying. Some orders are placed with agents of agents or through post office box corporations in Liechtenstein.

Even the CIA claims that it has no idea who is running up prices, and the market itself abounds with rumors. Last week's scuttlebutt had it that a single Saudi investor was looking to buy a ton of gold worth about $12 million, and the market was being dominated by just a few large purchasers--including one unidentified German buyer and an unknown Canadian industrialist. About all that is certain is that small investors are now joining in the gold action.

Nicholas Deak, president of the Deak-Perera Group, a major U.S. gold dealer, believes the bulk of the buying can be traced to three sources. Demand from the Middle East remains strong, he says, not only from OPEC governments eager to protect their oil profits from U.S. inflation and the decline of the dollar, but also from peasants and small traders for whom gold remains the most popular portable security. Demand from Europe is accelerating because inflation there is rising. Bullion fever has now spread to Switzerland, reflecting fears about inflation even in that land of granite-hard currency.

But the most visible demand for gold is coming from the U.S. Newspaper ads urge readers to bring their gold heirlooms in to dealers; panning for gold along rivers is again a popular hobby, and old gold mines are being reopened. In Atlanta, dentists report that patients are asking for the return of their gold inlays after they have been replaced with crowns. Large crowds and ever ringing phones are making the normally sedate quarters of bullion dealers look like bookie joints.

Most of the buy orders are for $10,000 or less, and some of the checks being used for payment are being drawn on credit unions and savings banks by small investors. Joseph Hale, president of World Wide Coin Investments in Atlanta, reports that one client wanted advice about whether to sell her house to buy gold. Most small investors appear to be looking not so much for profit as capital protection.

"They think the country and the economy are going to pot," says Jeffrey Gushing, a Massachusetts gold dealer. Coins, including the 1-oz. South African Krugerrand and the new 1-oz. Canadian Maple Leaf, which went on sale in the U.S. this month, are the most popular buys.

But gold can be perilous. Says Clayton Yeutter, president of the Chicago Mercantile Exchange, a leading gold futures market: "As the price enters the stratosphere, the risks become extraordinary. If you look over the edge from here, it's a long way down." Even if there is no great plunge, the small investor especially can find himself paying more than he figured for his bullion. When buying or selling coins, for example, dealers commonly add a charge amounting to 5% or more of the market price. Thus someone who bought a Krugerrand when gold was at $380 last week would have to wait for the price to hit $420 before he could sell and get his money back.

What investors must also be alert to is the old saw that when the little guy starts buying, the smart money is already pulling out. Says Walter Perschke, president of Numisco, a Chicago gold brokerage house: "Everyone wants to get into the gold boat. What they do not realize is that when everyone gets in, the boat sinks." If a great many large investors move to take their profits, the sinking could be rapid. Although there is no evidence of this happening yet, smaller investors who are unable to sell quickly could find that gold fever is not only contagious but very painful as well.

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