Gold's plunge carries it to $281 With $850 an ounce a distant memory, the bugs get anxious

January 09, 1998|By Jay Hancock | Jay Hancock,SUN STAFF

Asian stocks haven't been the only investments to get slammed by global economic stress. Gold prices have plunged by a fourth over the last year, prompting small price cuts in jewelry, renewing interest in bullion by small investors and unleashing fresh debate about the metal's role as a monetary anchor.

After reaching $850 an ounce in 1980 and then settling into the $350-$450 range the past 10 years, gold fell below $300 an ounce last month and touched $281 this week. That was the lowest spot gold price since 1979. Gold closed yesterday at $281.05.

Blame falling inflation, gold selling by national central banks and the fears of gold producers themselves, who have helped fuel the selling.

"There is an air of panic about this industry right now," said David Wallack, a natural resources analyst with T. Rowe Price Associates Inc., the Baltimore-based mutual fund company.

Jewelry prices are lower, but not by nearly as much as those for raw gold.

"In terms of how the drop in gold affects finished gold jewelry, it's a relatively small drop," said Chris Coleman of Nelson Coleman & Sons, a Baltimore jeweler. "It's a little like comparing the cost of steel prices to the cost of an automobile. It's not really going to affect it that much."

Even for items that are nearly all gold, such as earrings and chains, prices have fallen by only about 10 percent or 15 percent, jewelers report. An 18-inch gold-rope necklace that might have cost $285 before is now $240, Coleman said.

"It will affect the lower-priced, bulk jewelry," said Stephen Weinstein of Dahne and Weinstein Jewelers of Lutherville. "The significant gold watch that might sell for a couple thousand dollars might have only $100 worth of gold in it."

It is the sellers of gold bars and coins who have lowered prices the most and who say they've noticed a sales increase.

"My business is up 15 to 20 percent," said Brian Ott, president of Certified Rarities, a coin and precious metals dealer in Lutherville. "When the price drops a lot, you get people who get scared and think it's going to go lower, and sell. At the same time, you've got people who see the price go lower and think it's a good opportunity to buy."

Bullion dealers' prices move in close relationship to spot gold prices on commodity exchanges. Ott sells 1-ounce American Eagle gold coins for $20 over the spot price, for example. Canadian and South African gold coins go for less.

Gold prices remain under severe pressure.

With the world's central banks continuing to sell tons of gold reserves to jewelers and industrial suppliers, some people worry that gold will lose its monetary allure, becoming just another metallurgical product like titanium or copper. At the same time, moderating consumer prices worldwide seem to have eliminated any chance that inflation will rear up and save the day. Gold has been a traditional inflation haven, and flying consumer prices helped drive its price above $800 an ounce in early 1980.

In fact, as more and more economists discuss the threat of across-the-board price declines, or deflation, the case for gold gets even more bearish. Some analysts believe that gold's plunge is a deflation harbinger.

"It's an indication that something unusual is happening," said Lacy H. Hunt, an economist with Hoisington Investment Management in Austin, Texas.

The immediate cause of gold's fold is the gold producers themselves, according to many analysts. Fearful that daily, "spot" prices will continue to plunge, mining companies have been "selling forward," striking deals at today's price for delivery months later.

That ensures that prices for April production, for example, will fall no lower than, say, $280. But it also adds to the glut of gold seeking buyers now and helps to drive the price down. Speculators betting on lower prices have added to the downward momentum.

"Nervousness about what might be happening and what might happen has been part of the problem," said George Milling-Stanley, manager of gold market analysis for the World Gold Council, a Geneva-based trade group of producers.

Central-bank selling has helped stoke the nervousness. Some analysts question whether gold, the ultimate store of earthly value for three millenniums, should have a place in the monetary schemes of the 21st century.

The world's money systems have been loosening their ties to gold for decades, but many nations' central banks still have thousands of pounds of the metal stored in vaults to back local currencies. Lately, however, doubts about gold as a reserve resource have been getting a wider airing.

"There is a new generation of central bankers that believe they have an obligation to earn a return" on reserves, Wallack said. "These guys would rather own a Treasury bond that earns 7 percent than lend their gold to the market and earn 1 or 2 percent" -- or let gold sit in a vault and earn nothing.

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