Gold Prices Languish as World Stock Markets Sputter (Correct)
By Vladimir Todres
Gold Prices Languish as World Stock Markets Sputter (Correct)
(Corrects reference to specify UBS is moving spot gold trading in the 17th paragraph.)
London, Dec. 27 (Bloomberg) -- Oil prices have more than doubled in the past two years and world stock indexes are on track to finish the year down in some cases by more than a fourth.
The world is filled with news that historically lifted gold. A decade ago, when oil touched an eight-year high and spurred U.S. inflation, gold staged a one-month, $60 rally to $413 an ounce. Now, gold is at $275, a 28-year low after adjusting for inflation and on track for its first annual drop since 1997.
``My greatest concern is that people may start ignoring gold completely,'' said Peter Fava, head of precious metals at HSBC Bank Plc, one of London's top five gold-trading companies. ``If some of the really committed central banks, like Germany and the U.S., start to sell it, that would be the end.''
Instead of a hedge against bad times and a bulwark of the financial system, evidence is mounting that gold is just another commodity as central banks from Argentina to Australia sell their holdings.
Gold trading volume in London plunged to a record low in November, according the London Bullion Market Association, which oversees the market. Investment banks such as UBS Warburg are reducing the size of their trading staffs, while some of the most important gold traders are leaving the business.
Gold stock-indexes in Johannesburg and Philadelphia, which contain many of the world's top producers, are down more than 20 percent this year.
Markets Down, Inflation Up
In the past, accelerating inflation, declining stock markets and political uncertainty have caused investors to buy gold. Inflation in the U.S. and Europe this year is running at the highest rate in at least three years.
The benchmark U.S. Standard & Poor's 500-stock index this year has lost 10 percent, on track for its first annual decline since 1994. Japan's Nikkei index has slid more than 25 percent, while the Dow Jones Europe Stoxx index is down almost 5 percent.
In the Middle East, three months of clashes in Israel has left more than 350 dead, raising concern of a larger regional conflict in that oil-producing corner of the world. The U.S. presidential election had been unsettled for more than a month. Gold traders ignored it all.
``Gold just doesn't react to anything,'' said Adrien Biondi, a gold trader at Rabobank in London. ``At best, it edges up a bit -- only to fall immediately.''
How times have changed. A fabled king Midas used to boost Phrygian gold reserves simply by touching other materials -- and turning them to gold. Now many of the world's central banks are dumping their bullion to buy assets that offer better returns, such as government bonds.
Dumping Bullion, Coins and Bars
Banks from the U.K. to Uruguay have accelerated selling and lending gold this year, though stalwarts such as the U.S. and Germany have held their stores.
Private investors, too, are showing little interest. Sales of gold coins and bars plunged 30 percent to 89.6 tons in the third quarter, the producer-funded World Gold Council estimated. U.S. investors, who kept gold coins last year in case of computer malfunctions after the change to the year 2000, are selling them now.
In all, gold prices this year have fallen almost 5 percent. While the last few years have seen much debate about gold's role as an investment, the end of 2000 may settle the question.
``The market for gold is dreadful,'' said Ted Arnold, an analyst at Prudential Bache, who, after 24 years of following both precious and industrial metals, now focuses almost exclusively on copper, aluminum, nickel and similar metals.
Calling It Quits
Some of the biggest traders are calling it quits, while investment banks are reorganizing their trading desks. UBS Warburg is relocating its spot gold trading to Zurich, said Sarah Small, a spokeswoman for the bank. As part of that, the bank will cut its gold desk by about one-fifth by transferring staff to other divisions, a person familiar with the plan said. Small declined to comment on that change.
The most prominent recent departures included the resignation of James Riley, who headed gold trading at Goldman Sachs Group Inc.'s J. Aron & Co. in New York. Timothy Jones, who held the same position at the Bank of Nova Scotia in London, also left, to pursue opportunities in private equity.
Both companies denied the resignations were linked to the state of the gold market. Riley said he's going to ``relax.''
Those remaining in the gold industry privately bemoan the fact that that some of the best talent is choosing other options.
While finance officials stand behind gold, many recognize that its importance has diminished.
``Gold's importance as a monetary anchor came to an end with the emergence of more rigorous monetary policies,'' Antonio Fazio, governor of the Bank of Italy, told a gold conference in Rome last month, though was quick to add that in his opinion the metal should hold its role as a guarantee in the event of a crisis.
Even the disputed U.S. election did not bolster the gold market. Geneva-based trader and refiner MKS Finance on Nov. 10 raised its target price for gold by $10 to $272 an ounce amid presidential vote recounts in Florida, citing ``political concerns.'' Over the following week, the metal gained just 50 cents.
``We thought uncertainty around the vote might move gold higher,'' said Frederic Panizzutti, head of strategy at MKS Finance. ``But the market ignored everything.''
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