Bullion goes berserk as investors chase it to mid highs Spectacular and ever increasing jumps in the price of man's most treasured metal have become almost routine: from $400 per oz. in October to $500 in late December, to $600 in early January. Last week gold left even its most frenzied boosters gawking in astonishment. In five wild and erratic trading days it leaped by an incredible 34%, closing the week at $808 in New York, at $823 in Hong Kong, $835 in London and Zurich.
It was one of the most dazzling run-ups in history, and it underscored the enduring psychological lure of the yellow metal as the most consistently sought-after possession in times of strife and uncertainty. Concludes Sociologist Neil Smelser, author of Theory of Collective Behavior: "The gold rush is a classic case of panic. The people who are dealing in gold are operating under the fantasy that the world economic structure is going to collapse. They are living by the myth hat the only thing that will survive is gold." Harvard Social Psychologist Roger Brown compares the panic to he rush on the gates of the Who concert in Cincinnati that left eleven dead. Says he: "The fear that they are going to be too late and left out causes people to stampede." Adds
Psychologist Edward Taub of Maryland's Institute for Behavioral Research: "What we are seeing in action here is the law of positive reinforcement. Translated into lay language, that means greed."
Even in normal times gold has held a special attraction. As Jacob Bronowski wrote in The Ascent of Man: "Gold is the universal prize of all countries, in all cultures, all ages." Charles de Gaulle spoke almost lovingly of "gold, which never changes, can be shaped into ingots, bars, coins, which has no nationality, and which is eternally and universally accepted as the unalterable fiduciary value." From the biblical references to the gift of the Magi, to the modern-day totem of triumph in Olympic competition, gold holds a mystic promise. Says Smelser: "Gold resides in the subconscious of man as a tangible symbol for all the fantasies that are completely positive."
Last week other precious metals continued to share that positive attraction. Silver, which has been climbing along with gold, rose during the week from $39 per oz. to $47. Platinum, the costliest precious metal of all, and one with many high-technology uses as well, climbed to yet another record of $918 per oz.
Shares of gold-and silver-mining companies leaped on Wall Street, as did the stocks of many so-called asset companies. Unlike financial, service or processing firms, the corporations that possess coal, oil, timber, copper or other resources have assets that retain value no matter what happens to inflation, the dollar or the economy.
Yet it remained the swelling demand for precious metals, and the almost total absence of sellers, that kept markets in a weeklong state of 24-karat chaos. In the burgundy-carpeted, octagonal trading ring of the New York Commodity Exchange, where each day's worldwide price surge climaxed, there was unrestrained pandemonium. Brokers and dealers screamed buy orders in a deafening din that continued practically without interruption from 9:25 a.m. until the closing bell at 2:30 p.m.
In cities throughout the U.S. and Europe, people by the thousands lined up at jewelry and coin shops, lured by newspaper headlines of eye-popping new prices for gold and silver, and even by hourly news broadcasts on the radio. Most sought to cash in on the price explosion by selling their sterling silver table settings, candlesticks, gold bracelets, rings, watch fobs, even cavity fillings.
Have the gold and silver markets lost touch with reality? The answer seems to be yes. At present prices, an ounce of gold is worth more than a quarter ton of hamburger. Seven pounds of the metal would pay for a typical American single-family home. A suitcase of bullion would buy an oil tanker of crude.
Of course, the rise reflects intensifying anxiety over the world situation, particularly the crises in Afghanistan and Iran. Unlike the gold rush of 1979, when fears over the U.S.'s soaring inflation sent investors scrambling for bullion, the panic of the past month or so shows that people have escalated their apprehensions. There is a whole new level of apocalyptic worry about the intentions of the Soviets, the stability of Saudi Arabia, the destinies of a dozen or more nations that are vital to Western security because of their strategic positions or natural resources.
In times of such grave concern people are moved to switch out of paper currencies and into objects that seem immune to political travail. Observes Alan Greenspan, former U.S. presidential economic adviser: "There is a real possibility that what we are witnessing is a flight from investments that require an intermediary, be it government, a bank or any other financial enterprise. In recent months a special premium has surfaced for protection and anonymity. Gold is a store of value that governments cannot seize, devalue or easily confiscate."
Gold fever is especially acute in the Persian Gulf, where petroleum profits are pouring into Arab bank accounts at a rate of $50 million a day. Says Henry Wallich, a governor of the Federal Reserve System: "The gold market now is running in good part on the disorganized state of the world. If I were living in the Middle East I might wonder where I'd be living a year from now, and I might want to have something to take with me." Adds New York Bullion Trader James Sinclair, long a fervent backer of gold and silver: "Under the present circumstances, gold has become an outright escape mechanism."
The immediate beneficiaries of the gold surge are some governments, particularly the U.S., which holds about 8,600 tons of the metal, by far the largest hoard on earth. Last week it was worth some $220 billion, or more than enough to cover the estimated $160 billion in total U.S. dollars held as official reserves by foreign central banks. Technically the U.S. could offer to buy back all those dollars in exchange for gold. Observes a top Zurich banker: "The U.S. Treasury is once again solvent, thanks to the high price of gold."
Still, the U.S. eventually may pay a high price if bullion keeps leaping. The daily jumps add to the inflationary psychology in the nation. If a dollar is worth only one eight-hundredth of an ounce of gold, then it seems to be worth almost nothing. Thinking that, many people are moved to spend their dollars instead of saving them, thereby forcing prices up even higher.
There are indications that the mentality of spend and spend could turn the most widely anticipated recession in U.S. history into nothing more noteworthy than a soggy, sideways shuffle. Last week the Commerce Department reported that housing starts, while still down some 26% from 1978 levels, rose in December by a modest .3% from the month earlier. Personal income nudged ahead 1.1% last month to an annual rate of about $2 trillion. Figures for the final three months of 1979 showed the gross national product inching forward by a 1.4% annual rate instead of falling, as many economists had earlier predicted. Says Economist Otto Eckstein: "There is a real chance that private demand will simply refuse to weaken. Fear of inflation could easily keep consumers borrowing more and more money, and that would keep both spending and inflation high."
More inflationary stimulus could come from big new jolts of defense spending, as well as from perhaps $3 billion in unanticipated federal outlays to pay for the embargoed Soviet grain exports. Says Economist Walter Heller: "The military buildup alone could shorten and moderate the recession. It could hold interest rates up higher for a longer period of time, cause inflation to come down more slowly, and finally, force the Administration to postpone a tax cut."
Tactically, there is little that the U.S., or any government, can do to damp down the inflation-fanning gold rush. In its ill-starred effort to slow the rise in prices through monthly gold auctions during most of 1979, the Administration simply chipped away at its bullion reserves, thus reducing the stockpile at hand to rush to the dollar's defense in a time of monetary crisis. This merely encouraged gold's price to rise more rapidly. Says a top official of the European Economic Community: "Frankly, we have all been a little aghast at the foolishness of the U.S.'s unilateral gold sales."
Yet last week, when Treasury Secretary William Miller declared that no more auctions would be undertaken while the market remained so unsettled, gold traders instantly concluded that the Administration was now willing to see bullion prices rise freely to higher levels; so traders bought still more gold. The Soviet Union, a leading seller of gold to pay for imports of everything from American grain to Western European high technology, last year cut its gold sales from 500 tons to less than 250, enjoying the glittering rise in the value of its reserves in the process. Like oil exporters, the Soviets have discovered that leaving a precious commodity in the ground rather than exporting it simply helps drive up the price. Remarked one cynical Frankfurt banker in a bitter jest: "Maybe the Soviets have held back from selling because they knew they would get a better price after attacking Afghanistan."
Anything that rockets in price as breathtakingly as gold has done could as easily, and abruptly, plunge through the floor. Even a single bit of encouraging news about the Iranian or Afghan crises could start a decline that could bloody the speculators. At week's end there were tentative signs that a sell-off might be in the making. On Wall Street, canny investors were already short-selling shares of stock in gold-and silver-mining companies. Those investors are betting that metals prices will melt. There are, after all, two kinds of panic: to acquire —and to escape.
