The Pharaohs of ancient Egypt extended a state monopoly over gold and forced thousands of wretched slaves to mine the glittering ore. Since then, men and women have fought for gold, stolen for gold— and always relied upon gold as a sure investment in times of economic woe.
Last week, when world stock markets teetered and U.S. destroyers bombarded two Iranian oil platforms in the Persian Gulf, many analysts expected that the growing sense of doom would propel the price of gold bullion and gold-based mining stocks skyward.
Value: Instead, after a brief but sudden rise, bullion prices dipped slightly and then returned to precrash levels.
Gold-based stocks, in turn, wavered and then plunged. Peter Cavelti, president of Toronto’s Cavelti Capital Management Ltd., said that the crash was so severe that many investors had to sell gold. As a result, the price did not skyrocket.
“Trillions of dollars of wealth were wiped out,” he said. “In the scramble to raise cash, people had to sell anything liquid.”
Still, despite that sudden cash squeeze, gold bullion retained its reputation as the last storehouse of value. Indeed, its price remained relatively steady despite the collapse. In striking contrast, many gold stocks endured the same rough-andtumble adjustment that hit the rest of the market because many were overvalued. The crash brought their share prices more into line with company earnings.
The forces that drive up gold prices are both powerful and complicated. Patricia Mohr, senior economist with the Bank of Nova Scotia, said that when investors expect a period of inflation, they buy gold as a protection because gold prices rise when inflation rises. Mohr said that prior to last week’s stock market crash, investors expected moderate increases in inflation because the U.S. economy was strengthening and the trade deficit remained stubbornly high.
Brink: When that expectation of renewed inflation combined with rising tensions in the Persian Gulf, prices went on a roller-coaster ride. On Oct. 19, bullion prices shot to $481.75 U.S. ($624.54 Can.) per ounce from $471.60 U.S. ($611.45 Can.) in New York. Meanwhile, gold stock prices temporarily retained their value while the stock market plummeted. But within 24 hours of trading on the international market, bullion prices subsided. And the value of gold and silver stocks on the Toronto Stock Exchange (TSE) fell 19.97 per cent in one day. Analysts attributed the fall in both bullion and stock prices to the fact that some investors who bought stocks with borrowed money were forced to sell their more valuable securities and their bullion to cover their loans.
Many analysts said that prices also flagged because investor confidence momentarily failed. Julian Baldry, senior mining analyst at Toronto’s Nesbitt Thomson Deacon Inc., said that many investors concluded that Canada was on the brink of recession—so they sold their stocks and their bullion. “If we enter a major recession, you do not need gold as an inflationary hedge,” he said.
Tripled: Those recession fears eased. On Wednesday, Oct. 21, the market rallied. Bullion prices remained steady while the value of the TSE’s gold and silver companies rose 14.8 per cent. When the market lurched downward again at week’s end, gold prices rose to $473.40 U.S. ($623.14 Can.) in New York on Friday, slightly above its precrash level. Gold-based shares, in turn, dropped just over three per cent on Thursday and one per cent on Friday —as investors concluded that the stocks were overvalued.
Many analysts predicted continued but moder0 ate inflation—and thus Ï moderate price increases 1 in bullion to at least $500 U.S. in 1988. But the fuI ture of gold stocks was
less certain. David James, a gold analyst with Richardson Greenshields of Canada Ltd. in Winnipeg, noted that most gold companies are “very, very healthy”—and that their average cost of production of about $262 U.S. per ounce remains far below the current selling price. In contrast, Cavelti noted that many gold stocks have tripled in value since 1985—and that precrash share prices were unusually high when compared with earnings. But Cavelti also predicted that gold stock prices will increase slowly as bullion prices increase—and as investor confidence returns. “What I do feel strongly is that the investor in everything, including gold, is badly bruised,” Cavelti said. “He has had an experience that he will not forget for years to come.”
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