Gold, which glittered following the October stock market crash, has lost much of its luster, dropping to an eight-month low Wednesday with further declines feared.
Gold for February delivery closed at $438.70 an ounce on New York's Commodity Exchange, down $15.20 for the day and off about 12% from its peak in December. If gold doesn't rebound soon above $440 an ounce--a major psychological "support" price--investors could get further discouraged and drive the metal to as low as $400, some experts fear.
"The environment for gold has become increasingly negative" since mid-December, when gold briefly peaked above $500 an ounce for the first time since 1983, said Jeffrey A. Nichols, president of American Precious Metals Advisors, a New York investment firm.
The fall of gold--traditionally a haven against inflation or economic crisis--is the latest reflection of a new investor belief that a recession is more of threat to the U.S. economy than inflation and that the dollar may finally have stabililized.
"We may be gradually moving into a period where there will be more deflation," which is bad for metals, said Peter Cavelti of Cavelti Capital Management Ltd., an investment management firm in Toronto.
Gold's decline also is another sign of how some of last year's top investment performers have become this year's laggards.
Mutual funds investing in gold mining stocks--which gained 35.7% last year, making them the best performing group among mutual funds--now are the worst. They had declined 7.1% between Jan. 1 and Jan. 21 alone.
Silver, another star last year, also has dulled. Since rising above $10 an ounce briefly last April, it has fallen more than 35%. The February spot contract for silver closed Wednesday at $6.32 an ounce on the Comex, off 20 cents.
Platinum, which for the past few years has traded above gold--a sign of strong speculative interest in precious metals--now is selling almost as low as gold. That is an indication of how weak investors think the economy might become, since the bulk of demand for platinum comes from industrial concerns such as the auto industry, which uses the metal in catalytic converters. A weak economy suggests weak auto demand, and thus weak platinum demand.
Since peaking at about $682 in September, 1986, platinum has fallen 35%. Its February spot contract closed Wednesday at $443.80 on the New York Mercantile Exchange, off $14.70.
"If platinum trades at a discount to gold, it will indicate that we are headed for a recession," said Bernard Savaiko, precious metals analyst at Paine Webber.
The weakness in gold is in stark contrast to its fortunes only a few weeks ago.
While prices of many other investments fell following the October stock crash, the metal held its own and briefly topped $500 an ounce on Dec. 14 amid fears of higher inflation and signs that the economy might not tumble into recession as was feared immediately after the crash.
That buying optimism spurred sales of American Eagle gold coins, the favorite way for small investors to purchase gold.
But since late December, perceptions of inflation and the economy have changed dramatically.
Increasing Supplies Hurt
The dollar has rebounded from its lows of late December, spurring foreign investors to buy dollar-denominated bonds. That in turn has helped spark a rally in bonds while driving down interest rates, thus easing pressure on inflation. Tuesday's cut in the banking industry's prime rate, to 8.5% from 8.75%, provided further evidence of the trend toward lower interest rates.
And the release Tuesday of the Commerce Department's index of leading economic indicators, which dipped 0.2% in December for the third straight month of declines, adds to evidence that the economy could slide into recession sometime this year, economists say.
Gold also has been hurt by increasing supplies. Reports of large sales of gold by the Soviet Union, the world's second-largest producer, hurt prices Wednesday, gold manager Nichols said.
Nichols also cited expected future selling by gold mining firms, particularly in North America and Australia, and a major loan of gold by the Bank of Nova Scotia to Newmont Mining, a large U.S. mining firm. Such gold loans--in which banks lend gold to mining firms, which sell it to raise cash and repay from future output--are a relatively new form of financing that could spread and depress gold prices further, some experts worry.
Depends on Economy
Opinions on whether gold prices can recover from such bearish trends are divided, but investors clearly are cautious.
"It really depends on what happens to the economy," gold manager Cavelti said, noting that a weak economy will be bad news for gold bugs. However, if the economy gets so moribund as to spark a new surge in bank failures and a crisis in the financial system, gold could regain luster as a safe haven and store of value.
Market watchers say the short-term outlook will be determined by whether the metal can rally above the $440 level soon. That level is viewed as psychologically important because gold prices had a hard time rising above it in mid-1986 and then had difficulty falling below it last year, Cavelti said.
But a sustained slump below $440 could push gold as low as $400 or $405, analyst Savaiko said.
"To come back above $450, you will need a compelling reason, like a falling dollar or some very strong concerns about the inflationary environment," said John P. Norris, head of precious metals trading at Citibank.