In the City
Golden tide
Tony Rudd
The old textbooks used to say that gold was the classic store of value. In the strict sense that the mice can't eat the stuft, that may be true. But otherwise, it must be said that the investor can lose just as mach money in gold as he can in any other marketable security or commodity — if not more. And the devil of it is that gold has such a basic attraction. It has a lure entirely of its own, which itself can be such a trap' Back in the early Fifties, .when they Were opening up the great mines of the Orange Free State, a London broker who specialist ed in South African gold shares turned out a study on the Free State mines and called it 'The Golden Tide'. So evocative. But even then the stories were legion of how you could loge your money too. Was it not the case that in the assay of saMPles, from a newly sunk shaft, the geologist had dropped in his golden collar stud by mistake? And then there were all the hazards of the mine going wrong — the khaki shale and the water in the shaft; s° many mines it seemed, and always the ones in which one had one's own money, Pro' duced more water than anything else. This last year has rubbed in again what a dangerous metal we are dealing with. Last
Year the great decline in the gold price from the peak of over $800 an ounce appeared to have been arrested at around $380 an ounce with the consequence that the price started to behave quite well again, cruising through the low $420 to $430 range and finally starting to move up towards the $500 an ounce mark again. There appeared to be solid reasons for a recovery. When the price had dipped below $400 an ounce, which some thought was the original departure level for the great rise to $800 an ounce, there were very few sellers around, and when on a big retracement of price, with the cycle apparently complete, the supply has dried up, it is a very good sign. Furthermore at the time we had the Polish crisis in full spate. Gold is a classic hedge at a time of Political disturbance and Poland certainly amounted to that. But it was not to be. The rise petered out; the Poles fell under martial law; and the price of the metal fell below $400 an ounce again. Since then it has Plummeted.
Gold is pre-eminently one of the prices which is subjected to the obscure art of the chartists. There are more people with pen- cils and computers with little pens making dots on charts of the gold price than of any Other single commodity or share. It is a bell- wether of so much. And it is a pure market 10 the sense that there is very little in- terference. At the twice-daily 'fixes' in Lon- don the world's demand and supply are equated at a price which determines a great deal. Anyhow, when the price started shooting like an arrow towards $300 an ounce the chartists started to talk in terms of a 'target' on the downside of $250 an °Iince and even lower. These things are self- fulfilling. Such a fall is potentially pretty damaging to some important interests. The Price of $250 an ounce would present one quarter of the level reached several years ago. But for anybody who bought at the Peak the loss would be far greater. In real terms he would have to allow for the impact Of inflation on the one hand and of having forgone record-breaking interest rates and More per annum on the other hand.
Even at its present level of around $330 an ounce the price is hurting Russia and South Africa in equal measure. The Rus- sians have reportedly been sellers through the past 18 months. The twin impact of Poor harvests and of the worldwide economic recession has forced them into substantial and sustained selling irrespective Of the weakening of the price. Indeed their ,sales must have contributed in no small degree to that weakness. For the South Africans the present gold price is, if not catastrophic, certainly damaging. The , recession has hit that country in pretty well the same way that it has most others, fore- 11g the government to cut back on expend- iture and yet at the same time to try to maintain its revenue by an increase in taxa- I1°11. Interest rates are under pressure and the balance of payments of course did not i sums good. It is said that the government's '1-111-1s there have been done on a conser- vative estimate of the gold price, which
must mean a figure of around $300 an ounce. In other words at this level it's a matter of the Union having to tighten its belt and see its way through the resulting depression. But for a country whose ex- tremely tricky social problems can only be ameliorated by substantial economic im- provement (given that easement is still not on the cards) the low gold prices could not be less convenient.
In the rest of the western world the lower gold price probably doesn't matter too much. It does, of course, represent a diminution in the value of that portion of international reserve assets held by central banks in the metal. The fall makes a par- ticular impact therefore on countries like France which have traditionally held the larger portion of their reserves this way. It also means that substantial hoards of the metal built up by the OPEC countries, both in their official reserves and in private hands, have also fallen in value just at a time when the price of oil is under pressure too. In America, anything which puts the gold price lower is greeted with approbation in Washington, where the stuff is still disap- proved of. But for the private investors in America who have over the last few years bought considerable quantities of the metal the fall in price is, alongside the decline in share values, yet another disinflationary element in the overall picture.
This of course is what the fall in the gold price is about. Gold cannot, any more than any other so-called 'store of value', escape the impact of worldwide deflation which is now going on. With real interest rates, ad- justed for inflation, at levels in America which have practically never been seen before, the price of everything other than money must be pushed downwards. It is difficult to think of the exceptions to this rule. They certainly don't include gold.
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