Gold Plunges to 19-Year Low Amid Concern Russia May Sell to Raise Currency
Gold Plunges to 19-Year Low Amid Supply Concern (Update6) (Adds closing London gold price in 13th paragraph.)
New York, Aug. 28 (Bloomberg) -- Gold fell to a 19-year low on concern Russia may sell gold from its reserves, dumping even more on the market at a time when the metal has lost its appeal as a safe investment.
No longer is gold the asset investors hoard when other assets tumble. In the middle of global financial turmoil kicked off by Russia this week, the precious metal is down almost 4 percent since Monday. Gold for December delivery fell $2.20 to $277.90 an ounce in New York today, the lowest since June 1979. ''When should people buy gold as a haven if they don't buy it now?'' said Fredric Panizzutti, head of research at MKS SA in Geneva. ''It looks like people really don't consider gold as a safe haven anymore.''
The decline, sparked by concern that Russia will have to sell gold to raise cash to pay its foreign debt, is the latest in a 2 1/2-year slump for gold, which fetched more than $400 an ounce in February 1996.
Gold is down 35 percent since then because other financial assets, such as bonds, offer better returns when the pace of consumer price increases is slow. Central banks have shed gold reserves and economic turmoil in Asia hurt demand for jewelry.
For now, interest in buying gold is non-existent, said Urs Frei, head of gold trading at Credit Agricole Indosuez in Geneva. ''The 'safe haven' idea is dead here in Geneva,'' he said. ''There is no customer buying.''
Poor Returns
It's easy to see why. An investor who bought 30-year U.S. Treasury bonds two years ago would have realized a return of 38.2 percent by now. Over the same period, the price of New York gold futures has dropped 29 percent. ''People now feel that cash, treasury bills or certificates of deposit are better things to have'' than gold, said Lee Edelman, president of Marco Polo Precious Metals, a New York- based refiner that sells gold to jewelers and coin-makers.
And gold isn't alone. The Commodity Research Bureau index of 17 commodities is at a 21-year low, as supplies of everything from crude oil to cattle rise, and demand is weakened by Asia's economic problems. That's kept inflation in check in most industrialized countries. Consumer prices in the U.S. rose only 1.5 percent in the first seven months of this year. ''There's no reason to own commodities if you are an investor,'' said Vincent Lanci, a trader at Berard Capital Management in New York. ''Commodities are demand driven and there is no demand, so any investor can smell blood and is bailing out.''
Not long ago, gold was a prize. In October 1987, when the Dow Jones Industrial Average had its biggest decline ever, gold prices surged to a 3 1/2-year high as investors scrambled to buy precious metals.
Yet when the 30-stock Dow Jones average fell 4.2 percent yesterday, it's biggest drop of the year, gold fell. Even with Russians mobbing banks to in an attempt to buy dollars and Asia wallowing in an economic slowdown, investors aren't buying gold.
Weak Ruble
Gold has tumbled this week because of concern that Russia will be forced to sell from its reserves after the ruble tumbled almost 40 percent since Tuesday. Gold for immediate delivery in London fell $2.20 to $2.74.35, the lowest closing price since May 1979. ''The market is running on rumors about Russia and sales by other producers, and traders are shorting gold because of that,'' said Tony Cadle, a gold analyst at Rice, Rinaldi & Turner in Johannesburg. ''There is this bearish sentiment because the emerging markets are getting knocked.''
Russia wouldn't be the first to shed gold reserves. Last year, 18 nations sold gold worth an estimated $4.3 billion as central banks sought better returns elsewhere, adding to gold supplies and depressing prices that hovered below $300 an ounce.
In December, Argentina sold 124 tons of gold, most of its reserves. Five months earlier, Australia said it had sold 167 metric tons of gold, or two-thirds of its reserves, then worth about $1.784 billion. Both countries said they bought bonds. Since 1996, the Dutch and Belgian central banks have together sold about 800 tons of their gold reserves.
There also is speculation that producers are increasing sales to take advantage of the weakness in their home currencies, which means they get more for gold priced in dollars.
More Sales
Analysts at Macquarie Equities Ltd. in London reported Australian gold producers have sold metal they've yet to mine at prices they can lock in now, which many do when they expect prices to fall. When producers ''sell forward,'' they have to borrow gold from banks, who lend it from their reserves, increasing gold supplies.
With the Australian dollar at an all-time low against the U.S. dollar, producers have more incentive to sell their gold. In South Africa, the world's largest gold producer, and Canada, another big producer, the local currencies also are the lowest ever against the U.S. dollar.
Cadle, the Rice, Rinaldi analyst, said he's skeptical producers are selling large amounts of gold in the forward market because they were getting good returns on already mined metal. The rand today fell 4.3 percent to a record 6.86 to the dollar.
For South African producers, the falling rand is offsetting the decline in the price of gold. ''The rand is falling as fast as gold; it evens it out,'' said Roger Baxter, an economist at South Africa's Chamber of Mines in Johannesburg. ''The rand price of gold is stable.''
The gold price may be at or very close to its bottom, Cadle said. ''I personally don't see it going to $250,'' he said.
Others aren't so sure. There is little history of gold prices between $275 an ounce and $250 an ounce, and the metal could fall to the low end of that range, Panizzutti said.
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