In the City
More volatility
Tony Rudd
Markets today are like Test cricket: anything can happen. The slightest hope of lower interest rates in America and the US dollar falls at breakneck speed. One day last week it dropped no less than six cents against the pound. It recovered, of course, over the next few days. as these hopes of an easing in American credit markets receded. But the event demonstrated the speed and size of movements in the currency market which can occur these days. It has been very much the same in the London stock market. The more encouraging figures about the underlying trend in industrial output, showing that this may at last be the levelling-out, immediately drove up the equity market by ten points or more a day, producing an unexpected mini-boom for August.
The commodity markets are not without these kinds of movement either. There has been a surge in copper prices, and the rest of the base metal group, such as zinc and lead, have also been attracting attention. Perhaps the most intriguing recent development however has been in the price of gold. Having fallen for most of this year, as high interest rates squeezed holders and knocked the breath out of speculators, the price finally got back a month or two ago to the level from which it set out in November 1979, namely around and just below $400 an ounce. The move to the $400 level had been relatively orderly; it was the jump from November 1979 which was disorderly. In a series of breathtaking spurts. the price by February 1980 had more than doubled to over $800 an ounce. Since that dizzy peak the price has fallen in a series of waves until it got back to its starting point.
What was interesting was that when events had finally moved in a full circle there were virtually no players left in the game. Brokers specialising in the gold business in America have been going out of business recently or finding something elese in which to specialise. Gold shares have fared a little better because most of the better quality mines have at least produced a yield. Furthermore, as the price of these shares has declined so the yield has risen, providing a natural floor to that market.
The fact that market opinion about gold has become so negative and the whole idea of dealing in gold so unfashionable is exactly what the stuff of a potential recovery in the price is made of. Gold is essentially a panic commodity. People buy it when they are frightened. And there are signs that, at least at the margin, confidence is being eroded. The Polish crisis goes on and on and looks as though it's going to get worse rather than better. If the people of Warsaw are losing their patience at the length of the queues outside food shops in the middle of August in what is essentially an agricultural country, what will be the situation when they have to form even longer queues in the depth of their arctic winter when there are no fresh vegetables to be had? It looks very much as though Poland will only survive the winter if it gets massive imports of food. It is now becoming evident that little help however can be expected from the East; the in dications for the Russian grain harvest are poor at best and may turn out to be little short of disastrous. Paradoxically this could lead to a weakness in the gold price if Russia is forced to make substan tial gold sales in order to pay for the wheat imports from America which it has just contracted to make (the signing took place in Vienna the other day).
But setting aside this aberration in the market, the worsening Polish economic crisis is bound to be reflected in growing apprehension in markets generally and therefore an increase in the propensity of investors to take cover. Then there is the impact of such forthcoming events as the likely devaluation of the French franc. The French are traditional buyers of gold, having their own way of doing it, namely the purchase of the gold Napoleon. The return of welfare economics and demand management under Mitterrand's government inevitable means a resumption of the old French habit of tucking away wealth in the traditional manner. Long term, for the French, the france is a medium of exchange not a store of value.
Whether this propensity to return to the habits of yesterday will spread to these shores remains to be seen. The British have never been quite so keen on gold as a personal way of holding wealth, which is odd really considering how much they have suffered from the depredations of inflation. And when they Contemplate the possibility of Mr Wedgwood Benn taking up the reins of power, one might have thought that a few gold sovereigns either at the bottom of the pocket or at the bottom of the garden would amount to a very reassuring nest-egg. As yet, though, this is very much not a factor in the market, which remains dominated by the influence of professional investors and overseas operators. So far it is much too early to say that there is going to be a definite revival in the gold market. All that can be observed is that, apparently, the long haul seems to be over. We are back where we were in November 1979 and there is nobody around. The sellers have apparently dried up and the first few buyers have come into the market place. From a level of around $390 an ounce they have pushed the spot price in London up to (at the time of writing) just over the $410 level. What the people who attach real importance to charts are rterested to see now is whether this WV little recovery develops. Some would say that if the spot price in London, at the twice-daily 'fixing', pushes over $420 an ounce, or better still $425 an ounce, then a move of significance has occurred. The result of that will be, in all likelihood, a sudden widening of interest in gold once again. At that point the pundits will 1-1.43 doubt observe that wars usually start in the autumn and that the rise in the gold price is reminding us of that fact.
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