Unless you are one of those investors who had the foresight a year or more ago to get out of gold, the long slide of the precious metals has been both costly and disheartening. You may even be prepared to believe, as does most of the market, that gold is dead. But while it may have been foolish to ride gold all the way down to a 2½-year low, it would be equally foolish to sell out now. For gold is probably just hibernating, and now there is a rare opportunity to take new positions at bargain prices.
Notwithstanding recession, high interest rates, and gold sales by OPEC countries, the Soviet Union, and others, there is and will continue to be enormous resistance at the $300 level. To say that $300 per ounce is an important psychological barrier admittedly sounds all too familiar. The same, after all, was said about the $600, $500, and $400 marks. Glen Kirsch, manager of Deak-Perera (Washington), predicts that the $300 barrier "will be pierced," but adds, "The question is whether it will stay down there."
Much will depend on the volume of trading on futures markets. Thin volume will make it easier for short-side speculators to drive gold down. Even if the bears do succeed in overcoming the $300 obstacle, however, it seems very unlikely that sub-$300 prices could be sustained for long. Gold in the $200–$300 range should call forth tremendous buying interest.
It's no little secret that the biggest reason for the yellow metal's current doldrums is high interest rates—or, more accurately, the confluence of high interest rates and much-diminished inflation. With the consumer price index rising at a 3.6 percent annual rate and wholesale prices actually falling in time to the recessionary music, three-month Eurodollars were earning around 15 percent—an incredible, albeit hypothetical, 11.4 percent real return. One has to have a stout heart to bet against the dollar and in favor of gold at those rates, no matter how dire your long-term expectations.
But that isn't all that's been buffeting bullion. For one thing, the very fact that gold became far overpriced in January 1980 has amplified and accelerated the inevitable downward reaction. The late 1979 surge that took gold to $875 per ounce, silver to $50 per ounce, and platinum to over $1,000 per ounce sucked a lot of naively ambitious investors into the market. This included not just small investors but big timers, including countries like Libya and Indonesia. As the price decline has gained steam, selling has snowballed, bringing much of the newly acquired metal stocks back onto the market.
One of the biggest dampers on the market in the first quarter was heavy sales and rumors of sales by certain OPEC nations, chiefly Iran and Iraq, which are thought to have dumped upwards of 60 tons, but also possibly Libya and Indonesia. In addition to actual sales, many central banks have sought to use their gold stocks as collateral for balance-of-payment related loans.
Probably the worst of the hangover from the 1979–80 binge is now over. One would hope so, with gold having fallen nearly 65 percent, silver 86 percent, and platinum 67 percent since their peaks. In Washington recently, Credit Suisse chief Rainer Gut told me that the overvaluation of gold two years ago "has been digested." He called $300–$325 a bottom, though he predicted that gold would still be below $400 by year end.
Much will depend on adjustments in supply and demand, said Gut. He noted that both the Soviet Union and South Africa have been forced to sell more gold than they might like at these prices in order to finance their imports. But he speculated that by April the worst of these sales would be over. "Once we get down to a level between $300 and $350," he added, "it could well be that central banks would pick up some gold." Possibilities might include Switzerland and Japan.
Interest rates and inflation rates aside, the law of supply and demand has not been repealed. Already, at the lower price levels two things are happening. Gold and silver production are falling. A number of important South African mines have costs-per-ounce exceeding the $325 level, ranging up to $417 per ounce. Mining wage costs have risen 245 percent over the last decade, and one mine, Witwatersrand Nigel, has already closed down.
Meanwhile, both industrial and investor demand should increase. So far, due to the recession, industrial demand has not improved greatly. But silver consumption was about 7 percent higher in 1981 than in 1980, which shows that lower prices do attract increased usage. "I can't believe people won't take advantage of these prices to replenish inventories," observes Deak's Kirsch.
The most encouraging source of new demand has been Japan, where primarily small investors have suddenly discovered gold. Japan imported five times more gold in 1981 than in the previous year, and more is expected.
Naturally, demand will continue to be dampened by interest rates, which affect both inventory costs and the relative appeal of alternative investments. But there is growing evidence that interest rates are falling—particularly abroad.
A key question is whether this reflects diminished inflationary expectations or easier credit policies. Undoubtedly, people have adjusted somewhat to lower rates of inflation for now, but at the same time it is apparent that monetary restraint has loosened. That doesn't mean that hyperinflation is around the corner, but given Congress's unwillingness to cut spending, it becomes increasingly likely that the Federal Reserve will be forced—by statute if necessary, as House Banking Chairman Henry Reuss recently threatened—to accommodate fiscal policy. When this becomes clear, gold will take on its old glitter again.
Silver should be pulled along in gold's wake, particularly as the economy recovers. So should platinum. The biggest thing holding back silver will be continued uncertainty over the fate of the Hunt brothers' hoard, which purportedly must be sold under the conditions of their rescheduled loan agreement. But this worry has probably been exaggerated. The Hunts may yet be able to pay off their debts and keep their silver. And anyway, the Texas billionaires are not the only ones who recognize the beauty of silver at $7.04 per ounce.
Steven Beckner is a free-lance financial writer, the assistant editor of World Money Analyst, and the author of The Hard Money Book.