Sound of gold is clunk

The Outlook

look for new lows

Investors can diversify at low price, but big returns unlikely soon

July 11, 1999|By Rachel Sams

THE PRICE of gold tumbled to 20-year lows last week, with Britain failing to attract high bids as it began auctioning half of its reserves. The metal, traditionally a haven for investors in times of turmoil, was selling at about $256 per troy ounce, a far cry from its peak of $875 an ounce in 1980. Why are investors shunning gold? Will the price of gold go lower, or is this a good time to buy?

David Wallack

Natural resource analyst and portfolio manager, T. Rowe Price, Baltimore

The rate of inflation has been declining for the better part of the past 20 years. Over the last year and a half there has been a genuine deflation scare. Gold is viewed as an inflation hedge. It's not something people have a whole lot of use for in an environment of little or no inflation. Central banks have been selling gold for the last 30 years from time to time, but the pace has picked up in the last few years. A lot of central banks, particularly in Europe, are diversifying away from gold and to other currencies.

You're beginning to see some political pressure from Third World countries that are producers of gold. South Africa is still a very large producer of gold. Gold is still very important to its economy. Every time the gold price goes lower, mine shafts go out of business and people get laid off. The new president of South Africa, Thabo Mbeki, has said the decision of the United Kingdom central bank [to sell] is hurting South Africa.

You have quite a few mines becoming uneconomic at the current gold price. You're likely to see a significant amount of mine closures, which will decrease the supply of gold. You can see some influences that would help demand improve and help decrease supply. Pinpointing exactly where the bottom is is impossible, but we are likely getting closer to that point.

I think it makes sense to have a bit of gold in every portfolio because of the risk of inflation. It always makes sense to have a diversified portfolio.

Douglas Cohen

Precious metals analyst, Morgan Stanley Dean Witter, New York

I think in the grand scheme, everything that could go wrong for gold has, not just recently but for the better part of the decade. Low inflation, a strong U.S. dollar, a strong U.S. equity market and central banks willing to sell and lend gold in great quantities -- put it all together, and there's very little reason for people to flock to gold.

In the near term, I do think there is some additional downside risk. Prices could fall to $250 or so. If you're willing to look out over the next two to three years, I think it'll go to $300 before it goes to $200. It would be real hard to see prices go back above $300 anytime soon.

For people who have enjoyed some success in the equity market and are looking to diversify a small portion of their portfolio with gold, I think that's reasonable. You don't want to be too aggressive. People used to say 5 to 10 percent of your assets should be in gold. Now, I think that would be too high.

David Wyss

Chief economist, Standard & Poor's DRI, Lexington, Mass.

The cost of holding gold is high. Real interest rates are high, and interest rates are high relative to inflation. Gold traditionally has been the place people fly when they're worried, and there's nothing to worry about today. It's easier to keep a stack of hundred-dollar bills than a stack of gold. If you want to pick up and leave, you want something portable, and nowadays dollars are more portable.

The price of gold is probably too low, but I don't think we'll see a return to the glory days either. Probably in the low 300s is where it belongs in the long run. There's a lot of gold out there, and the price could go down before it goes up. It's a risky asset right now.

If you've got deep pockets, this is probably a good time to buy gold. Gold will look better in the future than it has in the recent past, but I'm not buying it. There are more exciting things to buy.

Suzanne Rizzo

U.S. economist, Maria Fiorini Ramirez Inc., New York

Investors are shunning gold because central banks such as the United Kingdom central bank have announced big sales of gold. You have a big holder that's announced their intent to dump a lot of it on the market. It's not a market development; it's a government decision. It's not necessarily being driven by economies. As far as private global economies, the outlook is for improving growth overseas and continuing growth in the United States, which ought to be favorable to most commodity prices.

As far as the United Kingdom's concerned, they've sold only about an eighth of what they plan to sell. There's probably still some downside risk there. With the economies of South Africa and Australia, this is having a very negative impact on their currencies. There's a disruptive effect there more than there is in the U.S. economy.

If you can afford to wait for the next five or six years, the answer is yes, it would be a good time to buy gold. It looks like there's still some downside out there.

Pub Date: 7/11/99

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