Richard Harmon: BARRON's Oct.4,1999 : Gold.com?
Gold.com?
By Alan Abelson
"Gold has been the ruin of many."
So warns the Good Book. Bearing mournful witness to that somber truth are
the hordes of innocents who invested their pittance of savings in the precious
metal at any given moment of weakness during the past two decades.
After hitting an all-time high of $850 an ounce in 1980, bullion went into a
prolonged swoon, interrupted by a brief flare in the mid-'Nineties that reached
its nadir around $255 an ounce just scant weeks ago.
The effect on that once-glittering species -- the gold bug -- has, of course,
been horrendous. Their faith has been put to a terrible test, and not a few,
alas, have suffered severe damage to both spirit and psyche. Increasingly,
their behavior has grown erratic, even dangerous. Indeed, of late, there have
been numerous documented instances of encounters between gold bugs and
mosquitoes carrying the dread encephalitis virus that have left thousands of
mosquitoes dead.
Suddenly, night has given way to dawn and, miraculously, gold has risen
phoenix-like from the ashes, its luster restored. In a single glorious week, the
price of gold shot up nearly $40 an ounce to over $305, at one point hitting
$321, and those doughty true believers, who never lost their faith in the yellow
metal, were beside themselves with ebullionce.
The unlikely agent of gold's remarkable renewal was the world's central
bankers. Nothing if not fun-loving, the guys decided, after years of torturing
gold-lovers by steadily feeding metal into the market, they'd take the exact
opposite tack. And so, after a mirth-filled night quaffing champagne and
giggling over the predictable consequences of their about-face, they
announced they'd give gold a break by curbing sales and such devilish
indulgences as dabbling in gold leasings, futures and options.
What really provided the chaps with such a rush watching the ensuing reaction
was that everybody -- commercials and the speculators, hedge funds and the
mining companies -- was short the metal. The jolly bankers just about died for
laughing as they viewed the mad scramble to cover.
While the action by the European central banks may have provided the initial
impetus for the thrust in gold prices, the surge would have petered out quickly
had it not been for the fear factor. Because gold has been so quiescent for so
long, people forget that since the emergence of trading man, it traditionally has
served as something solid to cling to when the world seemed about to spin
crazily off its axis.
Come on, you scoff. There have been all kinds of crises in the 'Nineties, from
the Asian Contagion to the implosion of Russia, rumbles in the Balkans and,
here at home, Monica and impeachment -- all with zilch impact on gold. Even
the trepidation and unease inspired by the approach of a new millennium failed
to add so much as a penny to the value of the tarnished metal. So what
menace could be so frightening as to touch off a mass flight to gold?
Ah, ye scoffers, you can find the answer in two words: Beatty and Trump.
Beatty, as in Warren Beatty and beatty-eyed. Trump, as in Donald Trump
and no-trump.
What Beatty and Trump -- or, lest we be accused of prejudice, Trump and
Beatty -- have in common is that both are threatening to run for President.
Yes, of the United States. Neither claims any real experience in politics, but
both boast considerable success in other pursuits (mostly of the opposite sex).
Normally, an actor with such soaring ambition would rate little more than a
headshake and a chuckle. Ditto for an eternally self-promoting real-estate
developer and casino operator. But these are special times, and Mr. Beatty is
not to be dismissed as just another pretty face nor Mr. Trump as just another
hubristic blowhard.
For, as things stand now, the nation is faced with the dreary task of choosing
among candidates, all of whom possess slightly less charisma than a cadaver.
There is no tangible evidence that Messrs. Bush, Bradley and Gore wouldn't
make fine Presidents; although, to be fair, there's even less tangible evidence
that they would. But each seems preferable to Mr. Beatty, who, if elected,
vows to save the world, and Mr. Trump, who, if elected, would pave the
world.
The danger is that if either Mr. Beatty or Mr. Trump chose to run, the
citizenry would be so mesmerized by the pizzazz of a peacock among the
mudhens that it would give him the keys to the White House. Put another
way, in a three-way contest, offered the choice between a pair of deadly
dullards and an animated dunce, the dunce is likely to get the nod every time.
In other words, investors, to their credit, perceived this dire threat to the
future of the Republic and hurried to protect themselves by laying in a store of
gold. Which explains why the metal briskly extended its initial gain. Should
Mr. Trump or Mr. Beatty actually throw his hat in the ring, the next price
point for bullion is $500 an ounce. If either were to get elected, $1,000 is in
the bag.
There is, of course, another possible spur to gold: the specter of inflation.
But that's ludicrous, since everyone knows inflation has been banished from
the face of the earth forever, by edict of the country's economists.
Still, while we tremble at even the notion of disagreeing with such eminent
seers, we must confess that there's a strange apparition on the economic
landscape that bears an eerie resemblance to ... inflation. After all, less than a
5% cutback in the production of oil has caused that critical commodity to
more than double in price. And there are kindred, if less pronounced, stirrings
in other commodities.
Moreover, rattling the stock market on Friday was the latest report from the
nation's purchasing managers, showing that prices paid by corporations took
a great leap upward in September, to the highest level since May of '95. And,
foreshadowing further bad news on this front, backlogs swelled.
Whether such early tremors scare Greenspan & Co. enough to notch up rates
again on Tuesday is anybody's guess. But if not this time, then next, and
maybe the time after that, as well. The economy's on a boil and, from all signs,
it'll take more than a fingerwagging from the Fed to cool it -- and, by
extension, to cool simmering inflation.
Whether inspired by the central banks, inflationary concerns or a combination
of the two, we suspect the price rise in gold is by no means over. We also
suspect the upswing will be something of a mixed blessing for gold mining
companies, some of which not only have sold a goodly chunk of future years'
production but also have made free use of derivatives to hedge against
declining prices, a move that could prove a hedge against solvency.
Charles Peabody, the maverick bank analyst who hangs his hat at Mitchell
Securities, cautions that a number of banks and investment-banking houses
are also vulnerable to pain on this score. Specifically, he thinks the spike in
gold may have caught some of these institutions "short gold at lower levels."
Among the biggest operators in the gold pits, Charlie notes, are Goldman
Sachs, Chase Manhattan, J.P. Morgan and Republic New York. He opines
that Chase "is most at risk of delivering disappointing results from its
goldtrading operations."
He also cites the fact that banks have exposure to the "gold carry trades"
favored by hedge funds, trades that have abruptly gone very sour because of
the spurt in gold prices. The banks provide credit to those hedge funds and
often invest in them as well. He cites Chase and Morgan as the largest
sources of such credit, but points out that typically over 70% of these loans
are collateralized.
And further, Charlie echoes our thoughts on the inflationary implications of
rising gold prices and suggests that this has obviously bearish implications for
the banks in the form of pressure on interest rates.
Most ominously, he recalls that the '87 unpleasantness in the stock market
was preceded by a comparable spike in the price of gold, and speculates that
the current rise might be discounting a similar "dislocation." |
