Big Boom in a Barbarous Relic

Gold's gyrations are the Dow Jones index of anxiety

For all practical purposes, the world has been off the gold-exchange standard for nearly eight years. When it comes to transactions among central banks, mankind's most treasured possession is supposed to have no more relevance than the Mongolian tughrik. So much for the official view of gold's value. Out there in the real world, the metal that Economist John Maynard Keynes once Wrote off as a "barbarous relic" has never shone more brightly.

From Bangkok to Bangor, investors are buying up gold -and paying record prices for it. Scarcely a week goes by without a fresh blast of bad news to push up the value of the mystic metal that thrives on crisis. Viet Nam's invasion of Cambodia, which began late in December, was one such event, but gold's biggest boost lately has been the winter-long turmoil in Iran. As investors have grown fearful of another energy crunch, the price has surged from under $200 per oz. in mid-autumn to a record $254 two weeks ago.

The climb has been helped by reports that South Africa, until recently a major consumer of Iranian oil, has negotiated a long-term deal to buy alternative supplies from Saudi Arabia in return for gold. Since South Africa is the world's largest gold producer and Saudi Arabia is the world's largest oil exporter, such a deal would divert much gold away from world commerce and into Saudi vaults, forcing up the price of the metal still more.

With the bullion markets boiling since before Christmas, a cooling-off period has long been overdue, and investors have been cashing in on their eye-popping profits. Last week prices closed at $247, but few believed that the run-up was over. Traders were even talking of gold's next new plateau, and gold enthusiasts were hoping that it would crack $300.

In fact, the 1970s have already seen one of the most spectacular gold rushes ever. This reflects a panicky flight away from paper assets -stocks, bonds, money itself -and back to the enduring luster of one commodity that neither corrodes nor tarnishes but seems in a sense to be the embodiment of immortality.

The allure is undeniable. In all of history, only about 80,000 tons of gold have been mined, no more than could be easily loaded into the holds of four C-5A Air Force transports. Current production adds a mere 1,430 tons annually, less than a 2% increase.

Gold glitters not just because it is scarce but also because the future of many other investments seems so chancy. Inflation in the U.S., revolutions and coups around the world -the litany of upheavals has ceaselessly eaten away at people's faith in the abilities of their governments to deal effectively with the multiplying threats to global stability. The result has been a worldwide boom in doom, and in the marketplace of despair gold stands out like a beacon of security.

In the words of James Sinclair, a leading New York gold broker, the price of the metal "has become a kind of Dow Jones index of investor anxieties." A worldwide subculture of goldbugs is thriving on the doubts. Gold has its bankers and boosters, its brokers and dealers, its lecturers and analysts. Each of them can quote Robert Browning: "Leave the fire ashes, what survives is gold."

Not only are private investors flocking to gold, but governments too are beginning to come back. It might even be argued that they never really left in the first place. Though U.S. policy since 1944 has been to "demonetize" gold and thereby reduce its importance as a store of any nation's wealth, the link between the dollar and gold is stronger than it has been in years.

The decline of the dollar has compelled the Federal Government to dip deeply into its own Fort Knox reserves in its efforts to prop the faltering currency. Since early 1975, the Treasury has been holding periodic gold auctions in an attempt both to drive down the metal's price and to improve the appalling U.S. balance of payments deficit. The auctions benefit the trade balance because gold sales to foreigners are counted as exports. The International Monetary Fund has also been conducting monthly auctions, but the dollar has kept plunging anyway. In fact, a key element of President Carter's November rescue plan, which finally succeeded in bringing at least the semblance of stability back to the dollar, was an agreement to double the amount of the Treasury's monthly auctions, to 1.5 million oz.

The Administration's policy of demonetizing gold will receive yet a further setback if, as is expected, eight of the nine members of Europe's Common Market next month begin pooling a portion of their official reserve holdings to create a kind of central bankers' supermoney. The European Currency Unit, or "ecu," is intended to be the precursor to a Common Market currency that would at least partly replace marks, francs, guilders and other national money. Each member nation must contribute not only paper money but also 20% of its gold reserves to the pool that will back the new ecu. In short, the ecu will be partly supported by gold. Laments one discouraged U.S. Treasury official: "The drive to demonetize gold has clearly suffered a major reversal. In just one year the weakness of the dollar has wiped out all the progress that we made in two decades."

Until recently, gold was only one of several beneficiaries of the global flight from the dollar. Investors also chased after the "hard currencies" that were not being debauched by inflation, especially the Swiss franc, the mark and the yen. As the dollar plunged, these currencies rose along with the value of gold. That is now beginning to change as more investors conclude that ultimately no industrial nation can withstand inflation and energy-related shocks. Says Guy Field, a London gold dealer: "Last year the high price of gold reflected the decline of the dollar on exchange markets. But gold is now moving ahead on its own accord as people insure themselves against the fickleness of all paper currencies."

Gold has always had a particular fascination for Old World investors, who have learned from grim experience that wars, revolutions and political strife can demolish less durable forms of investment. In France, the lust for gold remains as strong today as it was nearly two centuries ago when the National Assembly tried to spend its way to prosperity by issuing 400 million units of a paper currency called the assignat. Within five years, 50 billion of the worthless scraps were circulating, gold had jumped 600 times in value, and hoarding proliferated, even though the government made efforts to deal in the metal punishable by death.

Today, along with bullion sales to oil-rich sheiks, monied Asian merchants and Europeans, there is surging demand in the U.S. Of the 54.2 million oz. of gold that entered commerce worldwide last year, almost one-fifth -11.5 million oz. -was sold in America. The largest jump has come in the purchase of South Africa's heavily promoted Krugerrands. Last year the apartheid government in Pretoria minted 6 million of the 1-oz. coins, and nearly 3.7 million were imported by the U.S. That is more than twice as many as were bought the year before.

The largest bazaars for the purchase and sale of the metal remain in London and Zurich. As it has been since 1919, the worldwide price has been set twice a day on the London gold market by five of Britain's leading dealers in bullion. They meet in the offices of N.M. Rothschild & Sons, the City bank, and agree upon a price at which all are prepared to trade in the metal that day. Meanwhile in the U.S. an enormous and highly speculative market in the trading of gold "futures" contracts has developed on the New York Commodity Exchange and Chicago's International Monetary Market.

Nearly 60% of the gold that is sold ultimately becomes jewelry. In the U.S., it is marketed in shops from Beverly Hills' gilt-edged Rodeo Drive to Manhattan's grubby but thriving diamond district along West 47th Street, where wholesalers are constantly weighing their wares and repricing them as each new twitch in the gold markets alters their value.

Gold fever in the U.S. is so widespread that it is no longer accurate to speak of its victims as if they were right-wing zealots haunted by nightmares of starving marauders. A more typical buyer is New York Suburbanite Phillip Knapp, who is vice president of a paper firm. With a wife, three children and a six-figure income, Knapp seems every bit the successful American who ought to have confidence that the future will be as good to him as the past has been. But says he: "In 1975 I started to worry about where I could put my money. I say one thing to myself: it's not the franc or gold or silver that is going up, it's the dollar that is going down, and that's what worries me. Soon we will all be making $100,000 a year, and instead of increases in buying power we'll have $1 candy bars."

To protect his wealth, Knapp bought $10,000 in gold at $152 per oz., $10,000 in silver, and half as much in Swiss francs. Just over three years later, the gold is worth more than $16,000, and the other investments have also gained handsomely. Now he plans to increase his investments. At Deak-Perera, the nation's largest retailer of gold coins, Chairman Nicholas Deak reports that some of his recent customers have been high school kids. Says he: "It's a little scary. They just walk in and say they have a little money and they want to buy a Krugerrand."

Yet investment in gold may not be so clever. One often overlooked reason for gold's rise is that its value had been held down artificially at $35 per oz. for nearly 34 years, until 1968. Much of the climb since then has been merely catching up.

True enough, the 30 stocks in the Dow Jones industrial average have not performed nearly so well as gold in the 1970s. They have lost close to 8% in value. But that hardly means that gold, which pays no dividends, would have been a better play. It was illegal for Americans to own gold until 1975, and by that time foreign speculators, anticipating an immediate rush into gold, had bid it up to nearly $200 per oz. At that level, investors remained wary, and within a year the metal slumped to about half its value. Meanwhile, the Dow Jones average, which then stood at a bearish 616, began a rise. Even at last week's fairly modest level of 827, the Dow stocks have done better than gold since the beginning of 1975. The stocks have climbed 34%, while gold has gone up only 27%.

Some forms of gold investment may turn out to be sucker's bets. Anyone with just one Krugerrand can boast about his "gold holdings," but the coins typically sell for 6% to 10% above the going rates paid by dealers for bullion. Worse, some banks and jewelry shops that sell them will not buy them back except at a similar-size discount, and a number of retailers will not repurchase them at all.

Hoping to prevent the Pretoria government from profiting by the U.S.'s gold fever, Congress last year passed a law requiring the Treasury to begin selling its own one-ounce and half-ounce gold pieces next spring. The coins, with profiles of Louis Armstrong and Mark Twain, will not be legal tender in the U.S., and will presumably be no easier to swap for real money than the Krugerrand.

The Administration is clearly right in wanting to bury gold as a monetary reserve. It would be dangerous to make the official wealth of the world's nations dependent upon the erratic supplies of a metal that comes largely from South Africa and the Soviet Union, whose governments can pump up or cut off sales at will. But gold will continue to glitter until a stable and acceptable monetary substitute can be found. In theory, there is nothing wrong with continuing to use the dollar as the world's primary currency for international trading and holdings of national reserves. But the U.S. has printed so much money to cover federal budget deficits, and has run such big balance of payments deficits, that as many as $700 billion in greenbacks are swirling like confetti through the money markets of Europe and the Far East.

As a consequence, the world monetary system has become weakened and vulnerable, and even minor tremors often send currency values gyrating wildly. Lately the Administration seems to be coming around to the view that the system will need more than just day-to-day tinkering to keep it together. One possibility might be dragooning the ecu into service as a monetary reserve.

That would be another setback for the U.S., which has fought determinedly to retain the dollar as the world's leading reserve currency. If the dollar loses its dominant position, the U.S. no longer will enjoy the almost unique privilege of being able to run up huge deficits in international trade and paying them off simply by printing more money. The change would have the benefit of forcing the U.S. to accept some of the same economic and financial disciplines that the rest of the world's nations must endure. In brief, the U.S. would be obliged to contain its trade deficits, slow its creation of money and curb inflation. All that would tend to lift the dollar and depress gold.

One sign of just how willing the Administration may be to accept a diminished role for the dollar will come during IMF talks next month in Washington. The objective is to find a way of soaking up a portion of the $175 billion in U.S. currency now on deposit in foreign central banks. The favored idea, first proposed last year by H. Johannes Witteveen, former head of the IMF, is to have foreign governments give the IMF some of their dollar deposits, in return for which the fund would issue them its Special Drawing Rights. The SDKS are nothing more than units of account that cannot be spent but are accepted by central banks as reserve assets.

This "substitution account" idea is at best a first step, though certainly a necessary one. Taking it will help sop up at least some of the dollars that are now held abroad. The only lasting solution to the dollar dilemma is to give genuine value to the U.S. currency by reducing inflation and the energy-heavy trade deficit. Until the greenback is once again made as good as gold, many millions of people will persist in believing that the barbarous relic is still a better bet. qed

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