Inflation fears fuel surge in gold market

September 24, 1994|By John E. Woodruff | John E. Woodruff,Sun Staff Writer

Gold bugs got their first glimpse of the mystical $400-an-ounce level in 13 months yesterday, as the world's most watched metal led commodities in extending a surge that has driven many key prices to one- and two-year highs this month.

After receding from its mid-afternoon peak of $400.70, gold for December delivery closed at $399.60 on the New York Commodities Exchange yesterday, its highest since August 1993. It has risen by more than $10 since Sept. 1.

The August-September charge by commodities prices, which had already risen substantially this year, has reinforced investors' fears that steeper inflation lies just ahead, and with it still more tightening by the Federal Reserve Board. The central bank has boosted interest rates five times since February.

Those inflation jitters have kept financial markets turbulent since late last week and have been largely responsible for a 2.6 percent drop in the Dow Jones industrials average this week.

Commodities prices have risen broadly this year, with the Commodity Research Bureau's index of 21 commodities up 23 percent since Jan. 1. For many economists, the prices of more mundane materials count more than the prices of glamorous metals like gold and silver.

"Industrial commodities -- copper, aluminum, pulp and some chemicals -- are actually running up much faster than gold, and I think that's what you really have to watch," said David Donabedian, chief economist for Mercantile Bankshares Corp. "The question is going to be how far manufacturers, wholesalers and retailers are going to be able to go in passing those on down the line to retail prices."

Daniel Friel, vice president and senior economic analyst at NationsBank, concurred. "Unglamorous stuff like scrap steel and benzene, that's what actually works its way into consumer prices, and those prices have been working their way up all year," he said.

Copper prices hit a two-year high yesterday, zinc a seven-month high, aluminum a four-year high and silver a seven-month high.

Coffee, wheat and cocoa, driven by shortages due to bad weather in their main producing areas, also have shot up in recent months. Their prices show up in consumer costs much more quickly than industrial commodities and have been reflected in the Consumer Price Index for two months.

A minority of economists stick to a simpler analysis, the "gold bug" view that sees a direct link between the metal's price and inflation.

Each $10 increment in the price of an ounce of gold predicts an additional 0.2 percent increase in the consumer price index within the next twelve months, former Federal Reserve governor Wayne Angell, now chief economist for Bear Stearns Cos., told USA Today earlier this week.

The Fed's chairman, Alan Greenspan, frequently speaks of gold prices as a key indicator, but only one of several that the board watches. He describes it as one way of divining how much inflation seasoned investors expect, because some of them buy it as a hedge when they expect higher prices.

"I'm no gold bug, but I do believe we'll see more inflation and more interest rate increases," the Merc's Mr. Donabedian said. "We look for inflation to go from essentially the 3-percent range, where it has been most of this year, to essentially the 4-percent range some time next year."

The Merc expects the Fed to raise interest rates at least another half-point this year, "and that will not be the last time," Mr. Donabedian said, though the seventh move might wait until 1995.

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