When the price of gold shot up to $417 an ounce earlier this year, some forecasters began searching for that nasty culprit - inflation.
They didn't find it. Although gold tends to hold its value during inflationary times, it seems this time investors were buying the glittery metal for the same reason they buy wheat or lead or any other run-of-the-mill commodity. Yet, things are never that simple when it comes to gold. It still holds powerful sway over the imagination.
"There is a degree of irrationality attached to whatever discussion there is on gold," says Michel Camdessus, managing director of the International Monetary Fund (IMF). "It is extremely difficult to have a purely rational, cold discussion, even in the coldest circle of financiers ... on utilizing gold."
Mr. Camdessus should know. He backed a proposal last week at a meeting here of the IMF's policymaking committee that the fund sell a modest amount of its $40 billion in gold reserves- perhaps up to 5 percent - in order to make low-interest loans to a passel of developing nations who face such crushing debt that they can't hope to repay it under the current terms. None of the IMF's member nations seems to disagree with the idea of helping out. It's just that some of the fund's members, notably Germany, France, and Japan, are balking at the idea of selling gold reserves to do it. It would harm the fund's financial integrity, they argue.
Governments have long held onto gold as a way to buttress their financial integrity. They hold about a third of the world's gold today. Private investors hold another third in the form of coins and bars. The final third decorates women and men as jewelry.
The IMF accumulated its 103 million troy ounces in its early postwar years, when member nations were required to pay a quarter of their quota in gold. The Federal Reserve Bank of New York, the Bank of England, and the Bank of France store the fund's gold on deposit.
Since 1965, some governments have slowly sold a little gold. Canada has systematically unloaded much of its bullion. Others have trimmed their holdings - slightly. By December of last year, governments held an estimated 755 million ounces, down 4 percent from their holdings in 1992, the IMF reports.
These sales have helped to dampen the upward pressure on gold prices. For at least a decade, gold mines have not produced as much as the world has been demanding. Last year saw record demand, up 10 percent from the level of 1994, according to the World Gold Council. Much of the surge is coming from Asia, where trade liberalization and increased wealth has pushed up the demand for gold jewelry. India, the leading gold consumer, saw gold sales rise 14 percent last year, setting another record.
Turkey and Japan also witnessed big increases. US demand was up 5 percent, a record too.
All this has created what Richard Scott-Ram, economic adviser at the World Gold Council, calls a small bull market for the precious metal. "It's going up in steps," he says. Since the first quarter of 1993, when the gold price fell below $330 an ounce, prices have moved up to $417 before dropping back down to trade at about $391 today.
The next step, Mr. Scott-Ram says, will come when investors step in and buy. He says investors, having made millions of dollars in the stock market, might be ready to diversify their investments into gold - an instrument that could insulate them from any sudden downturns in the stock market.
As for the sale of some of the IMF's gold, the proposal will have to wait at least until the annual meetings of the IMF and World Bank next September.