FINANCIAL MARKETS : Steep Drop in Gold Prices : Helps Calm Inflation Fears
Market Overview
* A steep drop in gold prices set off a powerful rally in the Treasury bond market, as yields plunged to their lowest levels in three weeks.
* Gold prices plunged nearly $9 an ounce in heavy trading as the speculative fever that had raised prices nearly 18% this spring broke.
* Stock prices rose sharply, pushed higher by the lower interest rates, some positive economic news and diminished concern about inflation.
Credit
Gold’s tumble helped reassure traders that recent fears of higher inflation may have been overblown.
Bond traders said they were also encouraged by conciliatory words from a key Senate opponent of President Clinton’s deficit-reduction package, which seemed to improve prospects for its passage in the Senate.
The yield on the Treasury’s 30-year benchmark bond dived to 6.88% from 6.98% Friday as its price, which moves in the opposite direction, surged 1 9/32 point, or $12.81 per $1,000 in face value.
The bond market is especially sensitive to inflation fears because inflationary pressures are usually countered by higher interest rates, which tend to erode the value of fixed-income investments.
The supportive market developments helped unleash demand that was pent-up over the three-day holiday weekend.
On Sunday, Sen. David Boren (D-Okla.), who has opposed elements of the Clinton plan, voiced new willingness to accept some form of broad-based energy tax along with additional spending cuts.
That raised hopes that the federal government may have to sell fewer bonds to finance its budget deficit, which would boost the value of Treasury securities.
“Clinton’s budget package, tax-wise, is looking a little better,” said Jim Kenney, head trader at Prudential Securities Inc. “The thought of a reduced budget deficit might be helping.”
More buyers emerged as gold prices tumbled in the New York session following earlier declines on overseas markets.
That seemed to take some of the edge off worries about inflation, since investors buy gold as a hedge against increases in the cost of living.
Reinforcing that sentiment were several reports of economic sluggishness. The National Assn. of Purchasing Management, in a key industrial survey, reported that the manufacturing sector rebounded only modestly in May after a sharp one-month decline.
Also lending to the gloomy backdrop were government reports that, in April, construction spending failed to rebound and Americans’ income stagnated.
“These are not the type of things you want to see if you are an inflation bull,” said David Ader, a market strategist for Technical Data in Boston.
In recent weeks, fears that inflation is on the rise had contributed to wide speculation that the Federal Reserve would raise interest rates to check inflation. A tightening by the Fed would hurt the value of existing securities.
However, shorter-term notes and bills did not gain as much as longer-term bonds. Several participants said this indicated that the market still retained some anxiety over short-term interest rates heading higher.
Short-term Treasuries rose 3/16 point to 15/32 point and intermediate maturities rose 19/32 point to 23/32 point, the Telerate Inc. financial information service reported.
The federal funds rate, the interest on overnight loans between banks, rose to 3.313% from 3.125% late Friday.
Commodities
Analysts could cite no clear reason for the drop in the metals, which followed a week of volatile activity and steep declines in gold and silver on Friday.
“My guess is that we may already have seen the high for the year,” said George Milling-Stanley, precious metals analyst for Shearson Lehman Bros.
On the New York Commodity Exchange, gold bullion for current delivery lost $8.80 to settle at $369.50 an ounce. Silver prices also declined, settling at $4.394 an ounce, down from $4.611 on Friday.
Milling-Stanley said the investment funds that helped drive spot gold prices up from the March 10 low of $326 had became increasingly wary as prices approached $390. June gold peaked at $384.50, a 28-month high, on Friday; the August contract peaked at $386.50.
He said floor traders managed to depress prices enough on Tuesday to panic the big funds into selling.
Elsewhere in commodity trading, light sweet crude oil for July delivery rose 22 cents to $20.24 a barrel on the New York Mercantile Exchange.
Other Markets
The Dow Jones industrial average surged more than 40 points, briefly eclipsing its all-time high, before falling back to close up 24.91 points at 3,552.34, on Big Board volume of 229.65 million shares, up from Friday’s 207.81 million shares. The market was closed Monday for Memorial Day.
In the broader market, advancing issues outnumbered declines by about 12 to 7 on the New York Stock Exchange.
Until late in the session, stocks moved steadily higher, following the sharp rally in bond prices and the corresponding decline in interest rates.
“Stocks were driven by bonds,” said James Melcher, founder and president of Balestra Capital in New York.
Stocks were also favored by gains in share prices abroad. Share prices finished lower in Frankfurt, with the DAX 30-share average losing 11.96 points to close at 1,619.89. Tokyo’s 225-share Nikkei average was up 39.06 points to 20,591.41. In London, the Financial Times 100-share average 8.5 points higher at 2,849.2.
Among the market highlights:
* Gold stocks followed gold prices lower. ASA fell 2 to 47 7/8, Newmont Gold fell 2 to 43 and Battle Mountain Gold tumbled 7/8 to 8 7/8.
* Technology stocks were among the best performers. Hewlett-Packard rose 2 1/4 to 85 5/8 after several new product announcements. Compaq rose 1 3/4 to 59 5/8 and in NASDAQ trading, Microsoft jumped 3 5/8 to 96 1/4, while Intel rose 4 5/8 to 115 1/2.
* In other actively traded NYSE issues, Bally Manufacturing rose 1 7/8 to 9 3/8 after saying it will open a dockside casino in Tunica, Miss.
* RJR Nabisco ended unchanged at 5 5/8. The company said last week it had hired ConAgra chief Charles M. Harper to replace Louis V. Gerstner atop the food and cigarette company.
* Syntex rose 3/8 to 21. The company last week announced better than expected earnings before a restructuring charge.
* Strong cyclical stocks, those that tend to rise in an economic upturn, included Chrysler, up 7/8 to 45 1/4, and Caterpillar, up 2 5/8 to 74 1/4.
* In other NASDAQ trading, Hollywood Casinos jumped 4 3/4 to 31. The initial offering was priced last week at $16 each.
In currency trading, the dollar settled mixed in dull dealings.
In New York, the dollar closed at 107.15 Japanese yen, up from 106.95 on Friday. It fell to 1.587 German marks, down from Friday’s 1.588.
Market Roundup, D8
