Latest Plunge In Gold Futures Scares Buyers, Stumps Analysts July 16, 1999 – Posted in: Press
By PETER A. McKAY
Published: July 16, 1999
Wall Street Journal
A concerned customer called Chicago jeweler Tobina Kahn last week to sell a Tiffany necklace inherited from her late mother and made from six ounces of gold, plus two carats of diamonds. Her worry: Had the 50-year-old heirloom’s worth diminished literally overnight?
Ms. Kahn said no — that just doesn’t happen to vintage designer jewelry. But Ms. Kahn received several such calls last week after the Bank of England’s auction of 25 tons of gold slashed the metal’s price on world commodity markets.
Flash to San Antonio: Portfolio manager Gil Atzmon is scratching his head. He has followed precious metals for 15 years, and can’t understand the concern over the auction either, considering that 25 tons isn’t much compared with the total volume of gold traded daily.
“What’s been going on with gold leading up to, and since, the auction just goes against the fundamental principles of what makes markets,” says Mr. Atzmon, chief investment strategist for U.S. Global Investors Inc. “But maybe the problem with me is that I’ve just been at this for too long. I might understand things better if I had no experience to influence the way I see things.”
An Image Problem
Put mildly, gold has an image problem right now. But it is not just because of the notoriously bearish outlook for the metal’s asset value. Rather, investors and consumers alike are struggling to make sense of the economics surrounding gold, which some say have deviated from the trend lines the metal has conventionally followed.
World gold demand is increasing; but its commodity value continues to plummet. Shoppers expect bargains on products made from gold, or they flock to sell the pieces they already own. Yet there hasn’t been any change in those objects’ worth.
Gold futures have hit several new 20-year lows in recent weeks, and the August contract closed at $254.80 an ounce on the Comex division of the New York Mercantile Exchange Thursday.
World Demand
1998 data
Ounces
(millions) %
share
Jewelry 95.4 81.2%
Net private investment* 13.8 11.7
Electronics 4.3 3.7
Dental/medical 2.4 2.0
Other/industrial 1.6 1.4
TOTAL 117.5 –
*Includes bullion bars and coins
The metal, which traded above $600 early in the 1980s, is way past those heady days and has been declining for several years now. But the latest $34 slide began just after the Bank of England announced on May 7 its plans to eventually sell 415 tons of gold, beginning with the recent auction as its first installment.
Nuggets of Good News
Low inflation, gold’s declining role as a monetary standard, and central-bank sales such as the British auction have generally been blamed for the falling value. However, nuggets of good news are to be found in the landslide of gold selling.
Asian gold demand, which fell sharply during that continent’s financial crisis, has begun to improve over the past month or so, analysts say. American jewelry-manufacturers’ demand, which had increased 13% last year, is measuring strong gains again, as is consumer buying of gold coins. In the first half of the year, the U.S. Mint sold almost 39 tons of gold American Eagle bullion coins — one of the more convenient ways for small investors to own gold — more than twice the total for the year-earlier half.
Because of those demand trends, plus the fact that the British announcement had all of June to finish pummeling gold prices, market watchers’ expectations going into last week’s auction were split. Ultimately, the sale was interpreted as a bearish development as much because of what it symbolized as its fundamental effect on the gold market, said analyst Philip Klapwijk of Gold Fields Mineral Services Ltd., a London metals-research firm.
“I think it’s the signaling effect that’s most important here, as much as anything,” Mr. Klapwijk said. “The 25 tons certainly isn’t a huge amount, but the fact that someone’s decided to go from having 17% of their reserves to 7% is significant. This isn’t a Mickey Mouse bank, after all. It’s the Bank of England.”
Cuts Not Seen for Jewelry Buyers
But retailing analysts say those falling commodity prices have not yet resulted in similar cuts for jewelry buyers, and most likely won’t for at least three months. Frequently, they say, manufacturers simply substitute higher-quality gold — for example 18 karats instead of 14 karats — when commodity prices fall, thereby justifying similar prices for their jewelry.
Ms. Kahn says the effect of gold’s commodity price is even more negligible on the type of designer items that her small estate-jewelry company, the House of Kahn, purchases. Nevertheless, she says she gets three to four calls from concerned sellers on any day there’s significant bearish gold-commodity news, such as that of the British auction.
One of her recent customers, retired accountant Claire Fischer, said many older Americans view jewelry as an investment asset, a philosophy Ms. Khan discourages, since jewelry pieces don’t appreciate much in value over time. Craftsmanship and collectible value mostly determines the worth of such jewelry.
“People my age lived through a time when money wasn’t worth anything and banks were no good. For them gold — even their jewelry — was always something they could sell for value if they needed to,” said Ms. Fischer, 75 years old, who says she has tripled the money gained from her jewelry sales on the stock market.
Gold Viewed as Important Asset
“This is a different time now, though. Money is better than gold,” she continued. “The times have changed. Unfortunately, some people haven’t.”
Indeed, a recent poll taken by the mining-industry trade group World Gold Council showed that citizens in most industrialized countries still view gold as a valuable asset, even if their governments are busy selling it off. In the survey, 67% of British respondents and 76% of Americans said gold reserves are important to national economic strength.
Similar percentages in both countries said gold reserves are important to maintaining a strong currency.
Gold Council research has also shown public sentiment about gold to be largely uninformed, however. A 1997 poll by the organization, for example, showed that only about 7% of Americans can correctly quote the price of gold on any given day.