Gold's Brief Surge
Despite attack, the metal's outlook isn't bright
interactive.wsj.com
By Cheryl Strauss Einhorn
A knee-jerk reaction. that's what occurred in the gold market on Tuesday when the U.S. was attacked by terrorists. Prices rallied 5.4% that day, to $286 an ounce in London, after the major gold market in New York closed prematurely following evacuation of its Mercantile Exchange 9:08 a.m. (New York's "Merc," just west of the World Trade Center, is still standing, although building structures are being checked.) Though the move occurred in an illiquid market after the destruction of the twin towers, it was gold's biggest one-day gain in two years.
Investors were surprised by the move. While gold was once considered a safe haven during times of uncertainty and civil unrest, it has lost its luster in recent years as the financial markets have become much more sophisticated and better hedges against financial turmoil have become accessible.
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This time, however, investors were worried about the greenback, and about the general welfare of our nation. Thus, they chose to buy gold. Investors didn't bid up prices for deferred delivery of gold. No, this time, in the heat of the moment, they bought the active contract; they were interested in physical gold.
Gold demand shifted to Japan at the start of that country's trading day Wednesday, where the TOCOM, as the Japanese market is known, traded up the daily limit -- $10.40 an ounce. Over 9,000 lots, or nine metric tons, of gold Buy orders were placed before the opening. The last time gold reacted this way was during the Persian Gulf War, when the price rallied over an eight-hour period and then settled back.
Here too, gold prices did not hold their gains -- nor should investors have necessarily expected them to as all other markets took stock. "The belief that gold always soars in times of crises is a misconception," contends Rhona O'Connell, an analyst at the World Gold Council in London. "Its role as a hedge against risk means that it tends to be bought in anticipation of a problem and then sold, if necessary, if and when such a crisis materializes."
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As for what may happen in the U.S. when the gold market reopens -- and it is unclear as yet when that will be, given that the New York Mercantile Exchange is in the "frozen zone" where rescue workers continue to toil -- the New York analyst says he thinks prices will hold some of their gains. He thinks the Federal Reserve is likely to ease interest rates by another half-percentage point, which could spur inflation. |
