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Gold Prices Untouched by Financial Crisis - So Far

October 29, 1987

NEW YORK (AP) _ There’s a difference between panic and disaster, and that not-so-subtle distinction may be what’s keeping gold prices from zooming through the roof.

Since the crisis in the world’s financial markets began more than a week ago, gold prices only briefly ventured outside their familiar bounds, and some analysts are wondering why.

″Typically gold is a safe haven that people go to in times of turbulence, and this is a pretty turbulent time,″ said Deborah Olivier, president of the Claremont Economics Institute in Claremont, Calif.

The gloomiest of the doomsayers have long reasoned that a piece of eight will buy a meal if paper money becomes totally worthless. And if times are just marginally bad, the more optimistic of the lot say gold, being a tangible asset, will appreciate in value.

″A lot people are saying the atmosphere surrounding market appears to be positive for gold,″ said William O’Neill, director of research at Elders Futures Inc.

But gold reacted with subdued enthisiasm to the record 508-point plunge in the Dow Jones industrial average. On Oct. 19, the day of the now-historic crash, gold jumped $10.10 a troy ounce on the New York Commodity Exchange. But the following day, gold slid $18.50 on the Comex to close at $463.20.

″It essentially moved right back into the trading range that had been in prior to collapse,″ O’Neill noted. Since then, gold has inched up to the $470s.

The reasons for gold’s lackluster performance are several.

For one thing, gold is ″so negotiable that the scramble for liquidity may have hurt it,″ said Peter Cavelti, president of the Toronto-based Cavelti Capital Management Ltd., which manages several U.S. and Canadian precious metals mutal funds.

″As market crashed, gold was one of few things you could instantly liquidate to raise cash,″ he said.

But a more important fundamental driving precious metals prices is the spectre of high inflation. ″When it gets into the double digits, that’s when precious metals prosper, simply because they’re one asset that will appreciate -a confidence asset,″ O’Neill said.

If anything, the pervading fear is that the stock market’s gyrations will bring on a recession, with a major downturn in economic activity, higher unemployment and supressed consumer spending.

While a lack of general stability can drive gold prices higher, several analysts note that there has been panic, but it isn’t Armageddon. ″If you look at the scenario, there’s been nervousness and shock, but not disaster,″ O’Neill said.

Olivier said that fear seems to be concentrated in the stock markets. ″It isn’t broad-based,″ she said, noting that money leaving the stock market is flowing into more attractive Treasury bills and bonds.

″They are interest-bearing, which gold is not, and they’re certainly more negotiable than gold,″ she said.

Still, some investment advisers see a buying opportunity on the horizon.

Cavelti said keeping the lid on the panic level will carry a heavy price.

Current government policies that help to keep interest rates down, increase the money supply and prop up the dollar ultimately will prove very inflationary. ″The cost of this will be very high,″ he said.

″While it’s difficult to know when it will impact, we think just about after presidential election in late 1988,″ he said.

Cavelti said the stock market crisis has not obliterated the possibiltiy of inflation, but rather postponed it.

The logical time to buy gold will be sometime in the next six months, Cavelti said. ″I wouldn’t be surprised to see it drop another $40 an ounce, but there’s a buying chance there.″

Olivier also agrees that gold is overpriced now, by as much as $200 an ounce. If gold prices had mirrored price hikes in durable goods over the last several years, the metal would be trading in the $250-to-$350-an-o unce range, she said.

Cavelti dismisses methods that track gold against durables or oil prices or the stock market’s value as ″one of those pet theories everyone in the gold business seems to have.

″If you’re a gold investor, you have to be long term and buy gold as an insurance. You don’t worry about problems now, but where we will be in the future,″ he said.

End Adv Oct. 29

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