Inflation Watchers Look to Steady Gold Price for Assurance
But prices shot up last week in reaction to South African political violence and news of Whitewater widening
NEW YORK — GOLD prices are expected to hold steady or rise higher in the months to come - but not necessarily because of new inflation, a number of experts say.
The United States Federal Reserve Board, under the prodding of chairman Alan Greenspan, hiked short-term interest rates Feb. 4 as a preventive strike against a possible renewal of inflation.
Yet gold - the precious metal that has traditionally been purchased as a hedge against inflation - has shown little upward movement in price recently.
Up until late last week, in fact, gold-mining share prices were actually falling. And despite a momentary jump late last week, gold prices are not expected to register major hikes in the next few months.
Does that dichotomy between inflationary concerns by the Fed and the lack of a major uptick in gold prices suggest that inflation may not be the bogeyman the Fed believes it to be?
Gold has traditionally been an early-warning indicator regarding inflation, ``with gold prices moving up months before inflation actually occurs,'' says James Steel, a metals analyst with commodities broker Refco Inc. ``While some experts believe that gold is no longer as important a commodity [in foretelling future inflation], I believe that gold continues to do its job. And what gold has been pointing to for the past year or so is that there is no major underlying inflationary threat.''
``Most gold traders and traders in bullion markets are not convinced that inflation is all that much of a problem,'' Mr. Steel adds.
In recent weeks, gold has been trading in a range of about $7, moving up and down between $375 and $382 an ounce. Late last week, however, gold prices jumped sharply, despite reports that Japan was ready to sell 90 tons of gold left over from the minting of the emperor's commemorative wedding coin. Gold prices on the New York Commodity Exchange shot up $8.10 an ounce on March 10, reaching $388.20 an ounce, the highest level in five weeks.
The jump is largely attributed to violence in the black townships of South Africa, as well as concerns about the Clinton administration's possible involvement in the Whitewater scandal, rather than concerns about inflation, Steel says. South Africa produces one-third of the world output of gold and 70 percent of the world's output of platinum, Steel says. Therefore, violence there could have a sharp impact on gold prices.
Still, barring the unexpected, significant violence in South African mining areas is not expected, Steel says. By the end of 1994, gold prices will probably be where they are now, in the $360 to $400 range, he predicts.
``The gold market is well balanced at the present time'' between supply and demand, says John Lutley, president of the Gold Institute, a trade group in Washington. Investors ``don't believe that inflation is a real problem yet.''
Still, Mr. Lutley notes that demand for gold will continue to be strong for industrial and cosmetic purposes, and as an inflation hedge in nations such as India and China.
Demand for gold for fabrication purposes (jewelry and manufacturing), for example, continues to stay well above mine production. In 1993, mine production was 2,269 metric tons. But fabrication demand was 2,950 metric tons.
Nowhere to go but up
If gold bugs - speculators and investors - anticipate significant inflation down the road, that could become apparent this week. On Tuesday, the government will release the latest producer price index statistics; on Wednesday, consumer price index figures will be released. Any unexpected uptick in inflation could help propel gold prices higher.
Some commodities experts say gold prices have nowhere to go but up. For example, Vahid Fathi, a metals expert at Kemper Securities Inc., an investment firm in Chicago, says he sees gold prices reaching the $500 level by the first quarter of 1995.
There may be a new reason for long-range price appreciation, adds David Shulman, investment strategist for Salomon Brothers Inc., a New York investment house. Gold will soon ``become politically correct,'' Mr. Shulman says. Western governments, unable to provide large aid packages to Russia and the new multiracial government in South Africa because of budget constraints, will support higher gold prices through central bank policies. Higher gold prices would help shore up the Russian and South African economies, a political objective for Western industrial nations, Shulman says.