07/21/97 GOLD ISN'T WORTH ITS WEIGHT IN GOLD

View items related to this story

GOLD ISN'T WORTH ITS WEIGHT IN GOLD
With inflation at bay, central bank sell-offs are bashing investors
Jean-Marie Eveillard isn't throwing in the towel just yet. But with gold down almost $100 an ounce since early 1996, the SoGen Gold Fund manager is obviously disappointed. ''I'm a patient investor, but I've said that if a sustained move in gold was not in place by late 1998, that I would write shareholders a letter suggesting they redeem shares,'' he says.
Eveillard may want to start drafting that letter. As the yellow metal is slammed by central bank selling, the goldbugs of the world are getting squashed. With inflation nowhere in sight, a new generation of central bankers and private investors see gold not as a store of wealth, but as little more than a nonproducing asset--almost a commodity. And if, as some economists predict, worldwide deflation is in the cards, the rationale for buying gold is thin indeed. ''The incessant downward pressure on gold, as well as the Commodity Research Bureau index's decline to a two-year low, indicate that deflationary pressures are mounting,'' says money manager Joel Unger of Stralem & Co. ''If that's correct, there's no reason to buy gold as an inflation hedge.''
AUSSIE STUNNER. The latest blow came on July 3, when Australia's central bank said it had sold more than two-thirds of its gold, putting some $2 billion into U.S., German, and Japanese bonds. By July 7, gold for August delivery had fallen more than $13, to $319, and hit $314 during the day, an 11 1/2-year low. That's a far cry from early 1980, when gold commanded as much as $850 an ounce. While European central bank selling had been expected as countries gear up for the European Monetary Union, investors were stunned that Australia, a key gold producer, had sold. ''People are thinking that it's not just European central banks selling, that it could be anyone,'' says Robert W. Radsch, who manages the Lexington Goldfund.
Throughout the year, the strength of the U.S. economy and the dollar have been a real negative for gold. ''A strong dollar provided a very attractive return as a store of value,'' says goldbug Michael Metz, market strategist at Oppenheimer & Co. But for foreigners, gold became more expensive. ''The feeling was: So why not be in dollars and get 6%, too?'' he says.
Although demand for gold jewelry outstrips mine production, jitters over central bank selling have some analysts predicting gold could drop to $280 per ounce. Prices are so low that mines with high production costs find it uneconomical to operate. East Rand Proprietary Mines Ltd. in Johannesburg, for one, said it is halting operations at its Benoni Gold Mining division. Some goldbugs say that if supply shrinks as mines close and demand stays steady, gold could get a boost. But central banks have a way of upsetting that scenario by selling.
Assets in gold funds are shrinking. Since hitting a high of $5.7 billion in 1993, assets in the 42 precious metals funds tracked by Morningstar Inc. have shrunk 35%, to $3.7 billion, as of June 30. Says Robert Adler of AMG Data, which also tracks fund flows: ''No other sector is dropping this fast. Investor sentiment is being clearly expressed.''
Even investors who bought the stock of top-notch gold mining companies have suffered mightily. While the Standard & Poor's 500-stock index is up 22.5% so far this year, the S&P's Gold Index, which tracks such well-regarded names as Barrick Gold Corp. and Newmont Mining Corp., is down 23.3%. Barrick's stock has fallen 26.5%; Newmont is down 19.3%.
A few contrarians cling to hope. ''With talk about the stock market being massively overvalued and everyone hating gold, this looks like a really good time to raise our position,'' says Ralph Aldis, who may increase the gold weighting of U.S. Global Investor Inc.'s Gold Shares Fund from the usual 5% up to 10%. Lexington Goldfund's Radsch believes that gold is ''damn cheap historically,'' but says ''I'm worried it might get cheaper.''
What could lift gold out of its slump? ''You could get a short-term spike from commodity funds covering their short-selling,'' says Eveillard. Longer term, it would take economic or political turmoil, such as the Europeans being unable to have a single currency in 1999, he says. If the stock market dives, gold may shine. ''Just as we're having a parabolic move up in stocks, I think we're at the end of a sustained move down in gold,'' says Oppenheimer's Metz. ''It's an extraordinarily attractive asset.'' But only for goldbugs or masochists, it seems.
By Suzanne Woolley in New York

RELATED ITEMS

CHART: Off a Cliff