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Bears Make It Clear: The Holiday's Over

September 08, 1993|TOM PETRUNO

In a wild trading day filled with contradictions, gold and silver prices plummeted Tuesday, leading a broad decline in commodities and raising new questions about the economy, the stock market and interest rates.

Gold futures contracts for September delivery plunged $14.40 to $350.10 an ounce, pulling the metal's price back to April levels. Silver also dove, losing 26 cents to $4.26 an ounce, and platinum sank as well.

Though gold has been weakening since its brief surge above $400 in early August, many analysts figured the selling was simple short-term profit taking. But on Tuesday, investors appeared to return from the long Labor Day weekend with a new--and extremely bearish--attitude toward the metal.

In fact, markets Tuesday reflected fresh bearishness toward almost any investment tied to expectations of a strong economy, and by proxy, inflation.

Crude oil prices, for example, tumbled 66 cents to $17.07 a barrel, the lowest in more than three years, as new data showed high OPEC production amid falling global demand.

And the stock market also took a hit, with the Dow industrials losing 26.83 points to 3,607.10 as investors focused on last Friday's August U.S. employment news. The August report showed a surprisingly large loss of jobs during the month, confirming lackluster economic growth.

Yet amid all of this evidence of a weak economy, Federal Reserve Board Chairman Alan Greenspan suggested investors count on the idea that it won't always be so.

In written answers to questions from U.S. senators, Greenspan said short-term interest rates are "lower than necessary" for the economy's long-term health.

His remarks were viewed as another attempt to mentally prepare investors for the day the Fed nudges short rates up from their current 30-year lows--a move that wouldn't be expected until the economy shows some kind of sustained strength.

In theory, anyway, Greenspan's constant reminders that growth will pick up eventually should be supporting gold's price (though that certainly isn't Greenspan's aim). Faster growth could well mean higher inflation, and gold is still viewed worldwide as the premier inflation hedge.

What's more, many gold bulls have been arguing that this year's rally in the metal was based less on inflation than on simple supply and demand: Booming jewelry purchases in China and India were pulling overall demand for gold higher, while mine production worldwide has been growing only marginally. (Jewelry use accounts for by far the lion's share of gold demand.)

But Third World buyers, like all others, respond to price. And when gold moved up sharply in spring and summer, the price evidently became too high for these new buyers. The result: Global demand for gold, which had surged 24% in the first quarter versus a year earlier, inched up just 1% in the second quarter, according to statistics compiled by the World Gold Council.


Now, with jewelry demand still soft and no inflation on the horizon to motivate "hedge" buyers, gold may be on its way back to $330 or $340 an ounce, many experts say.

The extent of the new bearishness toward the metal is reflected in gold mining stocks, which had held up surprisingly well in August even after gold ratcheted lower from $400. Tuesday, an avalanche of selling hit the mining stocks, suggesting that investors see no reason to hold on to hopes for sharply higher gold prices anytime soon.

"There's been some damage done now," admits Dan Leonard, manager of the Invesco Gold stock mutual fund, when asked about the severity of Tuesday's selling.

What makes the near-term situation worse is that so many speculators jumped into the gold market during the early summer rise, traders note. "Those are probably the same people throwing in the towel now," said Robert McCurtain, a gold analyst at Ried, Thunberg & Co. in Westport, Conn.

Not, of course, that it should come as a surprise. Gold's history is nothing if not volatile, and anyone who plays in this arena ought to know that.


For many investors, however, the issue isn't whether gold drops back to $330 temporarily--but whether there is any reason to believe that the metal has real value in the longer term.

And on that count, the gold bulls refuse to budge. Their case remains as follows:

* If the world economy breaks out of its current funk, higher inflation is inevitable, and that should boost gold. Likewise, a rise in interest rates--as hinted by the Fed's Greenspan--also could cause a flight to gold by halting the bond market rally that now is a worldwide event.

"You've got a low-key yield panic now," says gold analyst James Dines in Belvedere, Calif. "The public is moving out of banks and into anything with higher yields, no matter what the risk. This is crazy," he says, and must inevitably end in disaster.

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