Currency Chaos Makes Gold A Money Magnet
Undated (AP) _ Gold became a money magnet in the past week as investors sought refuge from the chaotic currency markets. But the gains aren’t likely to hold.
This weekend’s French vote on European unity will point the way for investors who have taken temporary shelter in precious metals, market analysts said.
The biggest winners from the rally will be those who bought gold with British pounds, German marks, French francs or another currency that has fallen in value against the U.S. dollar.
Because gold’s price is measured in dollars on the world market, investors who bought the metal with one of those currencies will benefit in two ways when they take profits: the gold is now worth more in dollars and the dollars are worth more in the devalued currency.
The strengthening dollar enhanced gold’s traditional role as a safe haven for European investors during the currency crisis.
″Basically, you’re getting more,″ said Peter Cardillo, research director with Westfalia Investments Inc. in New York.
Gold began the week at about $341 a troy ounce and ended it around $351 as European investors poured assets into precious metals. Over the same period, the British pound’s value sank from $1.93 to about $1.74.
So while gold’s worth in dollars rose about 3 percent, its value in pounds increased by about 14 percent.
The phenomenon was an anomaly; the gold market normally declines when the dollar strengthens. It rose in this case because of gold’s ancient appeal as a store of wealth, a sort of international currency that retains its value in troubled times.
″It’s recognizable anywhere,″ said Martin Reichenberg, manager of trading services for the Pegasus Econometric Group in Hoboken, N.J. ″You can take it to any country and exchange it for the local currency.″
For the same reason, gold is regarded as an investment hedge against inflation. The relatively low rate of inflation in the United States is a major reason for gold’s dull performance this year. It traded at a 6 1/2 -year low of $332.50 last month.
After Sunday’s French vote on the Maastricht treaty, which proposes closer political and economic union for the European Community’s 12 member nations, European investors likely will pull their money out of gold and begin trading currencies again, said George Milling-Stanley, precious metals analyst with Shearson Lehman Brothers Inc.
An outcome favoring implementation of the treaty likely would lend strength to the European currencies, analysts said.
Rejection by France means the end of European unity, Cardillo said. In that case, he said, the trend in Europe would be toward lower interest rates to stimulate economic activity. The dollar would gain in the short term and worldwide inflation could increase in the longer term, eventually lending strength to gold.
However, there is little hope that gold will sustain its recent gains in the near term, he said.
″Once the crisis blows over, I think you’ll see a return to the economics of gold and the economics do not warrant gold at this level right now,″ Cardillo said.