Gold bugs smarting as theory on crises stumbles

When the Israelis marched into Lebanon, Andre Sharon was certain this would pump up the price of gold. After all, Mr. Sharon reasoned, tensions in the world were supposed to be good for precious metals. And, he said, this was the third - and potentially most explosive -- war that was going on simultaneously.

But when the price of gold fell instead, Mr. Sharon, a vice- president at Drexel Burnham Lambert Inc., a brokerage house, was disappointed. So were many other precious-metals analysts.

The lesson to be learned from this disappointment, the analyst says, is that ''the underlying economic realities are more important than political developments.''

This marks a major change in the mythology surrounding gold. ''Gold bugs'' have traditionally called gold an excellent investment during times of world crisis. Gold has always been called the one ''currency'' that would be accepted when other currencies were worthless. And gold buffs could always drag out tales of how Frenchmen managed to eke out an existence during World War II on their gold hoards.

This year, however, even with a war in the South Atlantic, a war in the Gulf between Iran and Iraq, and the Israeli invasion of Lebanon, gold continued to go down in price. Even the wars could not halt a slide that began early in 1980, when gold peaked at more than $800 per troy ounce. This year the price started at just over $400 an ounce. On Friday, it closed at 305.50 in London.

What ''economic reality'' is more powerful than multiple wars?

In two words: interest rates.

In a recent speech at the annual conference of the International Precious Metals Institute, Jeffrey A. Nichols, an economist with J. Aron & Co., precious-metals dealers, said: ''Since the initial price break in early 1980, restrictive US monetary policies have continued to be the main determinant of gold and silver prices. High real interest rates have made alternative investments more attractive and have led fabricators to pare their precious-metal inventories.''

Drexel Burnham's Mr. Sharon figures that with three-month certificates of deposit yielding 131/4 percent and inflation running at a 6 percent annual rate, investors in such things as CDs and money-market funds are receiving 7 percent real rates of return. ''Thus, they are being well paid to do nothing,'' he comments. ''And when you are well paid to do nothing, why invest in gold, bonds, or stocks? I figure you have to get at least a 20 to 25 percent return (from gold or stocks) to justify investing in them.''

Charles Stahl, the publisher of Green's Commodity Market Comments, says somewhat facetiously that he has given up predicting the direction of gold. ''If I was able to forecast interest rates, I would be able to give you a proper forecast for gold,'' he says.

Yet some analysts are still debating whether interest rates will be the all-determining factor in the price of gold. Mr. Nichols, of J. Aron, maintains that investors' fascination with interest rates is only temporary -- part of what he calls tunnel vision. This tunnel vision focused on the weak dollar in the mid-1970s, inflation and rising oil prices in the late 1970s, and on international political developments in late 1979 and early 1980. Now, investors are firmly locked on to interest rates. But, he concludes, ''After some interval, which can be as short as a few weeks or as long as several years, market attention shifts to something else.''

Mr. Stahl suggests that the markets may soon focus on the US elections this fall. ''If I see a lot of Democrats voted in in November, that may stimulate gold,'' he says, ''since people may think inflation is starting all over again.'' And Mr. Nichols holds that any economic recovery, if built on lower real rates of interest, will strengthen gold and silver prices. He believes purchasers of gold will look back at these prices levels and consider them ''attractive.''

Exactly when the price of gold will rebound, however, is another matter. On June 17, James Dines, known at the ''original gold bug,'' threw in the towel and sent out what he called his ''MVAOOAOGASSS,'' or ''Much Vaunted All-Out One and Only Gold and Silver Sell Signal.'' Mr. Dines's removal of his multiyear buy signal helped the gold price fall that day another $8.80 per troy ounce.

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