Turmoil in East Bloc, Domestic Jitters Send Gold to High for ’89
Gold prices, responding to political upheaval in Eastern Europe and signs of economic uncertainty, are soaring. But experts are split on whether the rise can be sustained.
The price of the precious metal, after languishing for much of the past two years, hit its 1989 high on Friday. It has risen about $59 an ounce since Sept. 15.
The November futures contract for the precious metal rose $7.90 to close at $418.90 an ounce after heavy trading on the New York Commodity Exchange. The price eclipsed the previous 1989 high of $413.40, set Jan. 3, for the spot contract on the Comex.
Meanwhile, the dollar weakened against all major currencies in slow trading Friday, settling at an 11-month low against the West German mark.
Gold is seen as a financial hedge in times of political turmoil or economic uneasiness. Many analysts say continuing uncertainty in Eastern Europe--Czechoslovakia’s entire leadership resigned Friday--accelerated a 3-month rally.
Some market observers say concerns about the dollar, falling interest rates and predictions of higher inflation are contributing factors to the rise. They predict that gold prices will continue to rise over the next few months.
However, other analysts, including Charles Clough, chief investment strategist at Merrill Lynch, say gold prices were simply due for a cyclical rebound and say the surge will soon end unless more serious inflationary pressures build. Gold bottomed out at $354.75 an ounce in mid-September, significantly below the last peak in December, 1987, when the price hit $500 an ounce. “It (gold) has been a pretty unattractive investment for awhile and it didn’t take much to rally it,” Clough said. “It’s been down for nine years and it appeared that it would not go down any further.”
Clough said the Federal Reserve’s recent decision to ease the money supply is not a harbinger of inflation.
“There is a strong possibility that the rise could be related . . . to all the turmoil in Eastern Europe and Soviet Union,” Clough said.
However, David Hale, chief economist at Kemper Financial Services in Chicago, said declining interest rates are a major factor in the gold market. Falling interest rates are weakening the international value of the dollar, generating new interest in gold.
“In the short term, the events in Eastern Europe contribute, but are a minor factor (in the gold market),” Hale said.
Eastern Europeans want the kind of political change that will allow the restructuring of their economies and will enable them to increase their purchasing power, said Norman Mains, research director at the brokerage of Bateman Eichler, Hill Richards in Los Angeles.
Many investors are buying gold because they expect Eastern Europe to consume a larger share of Europe’s goods and services, boosting inflation, said Mains, who predicts a further $15 rise in gold prices by year-end.
“Demand creates inflation,” he said. “If inflation goes up in Europe, it will be translated into a worldwide phenomenon.”
Rumors of major economic restructuring in the Soviet Union are fueling much of the drive toward gold, said Edmund Serfaty, vice president and portfolio manager of the San Antonio-based United Services Gold Fund, a mutual fund.
Serfaty said many investors believe that the Soviet Union, a major supplier of gold to world markets, may place quantities of the precious metal in a reserve to back its beleaguered currency, which has “little credibility” in world markets. Such a move, by keeping future supplies of gold off the market, would make the metal more valuable, Serfaty said.
“I don’t know that there is a single reason for the rise,” he said. “It’s rising for a combination of reasons.”
Serfaty said gold could reach $500 by mid-1990.
Silver rallied in reaction to gold’s surge. The December contract at the New York Commodity Exchange rose 7.4 cents to $5.874 an ounce, and traders say it may soon breach the $6 barrier.
Platinum also surged, closing up $7.70 an ounce at $538.70. Barry Stuppler, president of the Encino-based Gold & Silver Financial Group, said mined levels of platinum were low and predicted a steady increase in the price for the commodity.
The dollar slipped to 1.8040 West German marks in Europe on Friday, down from 1.8157 late Thursday and the lowest level since it stood at 1.7955 marks on Jan. 5. In New York, the dollar traded at 1.8010 marks, down from 1.8162 marks late Wednesday. The domestic market was closed Thursday.
