A Market Inoculated Against Gold Fever

For months, gold bugs have had it made in the shade--in theory. With fundamentals looking solid, economies picking up around the world, and the threat of U.S. inflation looming, gold bugs reason, the yellow metal should be the year's hot commodity. But instead, gold bugs have found themselves in the economic equivalent of a roach motel: locked into lower prices, with no breakout in sight.

Why no gold fever? Part of the blame must go to Federal Reserve Board Chairman Alan Greenspan, who pegged gold as an important indicator in his battle against inflation. If gold were to rise, investors fear, the Fed would push up interest rates, thereby cooling inflation and causing gold prices to decline. The market is also feeling pressure from gold producers and dealers itching to sell into rallies. And there's no sign of marquee investors such as George Soros, who helped end the metal's five-year bear market by igniting speculative interest a year ago. "I don't see any rush to buy gold. We're not going anywhere," declares William B. O'Neill, senior futures strategist at Merrill Lynch & Co.

BULL-PROOF METAL? For the long term, though, "bullionaires" still have reason to hope. While a repeat performance of last summer's sharp rally seems unlikely, there are enough bullish factors to cause gold to rise modestly over the balance of the year and even to surpass $400 an ounce. And since the bear market appears to have bottomed out last year, there seems little potential for a drop below $360. "The risk you have is that you may have to sit on [gold] for a while," notes Bernard C. Savaiko, senior analyst at PaineWebber.

The current doldrums are in stark contrast to gold's wild and crazy ride in 1993. Gold soared to $409 during the summer, collapsed to $343, and rebounded to end the year at $392. This year, gold languished for several months, then recovered a bit in late May. As of early June, it stood at $383, down 2.3% from January. And gold-mining stocks fared even worse: Gold-oriented mutual funds lost 7.6% through May 31.

The metal has shrugged off several opportunities to rally. Even when the threat of terrorism idled hundreds of South African mineworkers in mid-April, prices barely responded. Gold has also ignored favorable supply-and-demand trends. Mine production rose just 2% in 1993, the lowest growth in output since 1980. And central banks have cut back gold sales, but even so, prices have failed to respond.

There is at least a golden lining in this bleak situation. Says Ian C. MacDonald, chief of precious-metals trading at Credit Suisse: "The market has absorbed a tremendous amount of distressed selling [in recent years], and it's still holding up."

A good dose of U.S. inflation, of course, would give gold a boost. A few signs do point to higher prices, notably the Commodity Research Bureau index, which as of early June had jumped 14% from a year ago. But at present growth rates, inflationary pressures remain virtually nil. And Greenspan appears determined to keep it that way. "We're likely to see interest rates rise more rapidly than inflation," predicts University of Chicago professor of international economics Robert Z. Aliber. "That cannot be good for gold."

SOLID FOOTING. Yet that may not hamper silver markets, which have become a favorite playground of speculators. In March, U.S. hedge funds were rumored to be spending as much as $1 billion to buy the metal from warehouses. After reaching a 1994 high of $5.80 per ounce on May 23, silver fell back to $5.26 as of early June, as speculators cashed in their profits.

Analysts expect to see more gyrations between $5 and $6 an ounce over the course of the year. Platinum, meantime, has made small gains amid strong demand for automobiles, which use the metal in catalytic converters. Some believe stepped-up industrial demand will put platinum on an especially solid footing and may help support silver prices, too.

And that rising tide may yet buoy gold. What bugs really want is a big economic event--a dollar crisis, for instance--that could bust the market wide open. But barring such a calamity, gold aficionados will remain the bad news bugs of the investment world.

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