More Mess for Metals

Plunging, surging and sliding along with gold and silver

Was it the start of a broad and bloody selloff, or just a brief interruption in the wild climb of gold and silver? That question last week taunted everyone from Middle East oil sheiks to Chicago secretaries. In the biggest one-day tumble in precious metals history, gold slumped a startling $145 per oz., or 18%, while silver dropped $10 per oz., or 22%. Yet prices began bouncing back up, sending investors on an unnerving joyride.

At various times during the week, gold sold for as much as $875 per oz. and as little as $580. As prices changed sharply almost minute by minute, they varied substantially on markets in different parts of the world. By week's end gold fetched $640 in New York City, while in Hong Kong it was worth $705, and in London and Zurich $670. The price differentials for silver, which had risen even more spectacularly in recent weeks, to a peak of $50 per oz., were equally extreme. In London the metal closed at $37.50, and in New York at $35.50. In some cities, merchants did a curious trade in selling everything from gasoline to bacon for a mere 5-c- or 10-c- per gal. or lb.--just so long as customers paid in pre-1965 coins, which were still worth many times face value because of their silver content. Even copper went through contortions. It shone, lost luster, then brightened to $1.30 per lb. If copper reaches $1.50, pennies will be worth more than 1-c-.

As market turmoil intensified, small investors found it increasingly difficult to buy or sell gold or silver coins. Normally, dealers provide price quotes over the phone, with the quote remaining in force at least until the next price "fixing" on a major bullion market. But last week, investors had to go to a dealer's shop in person and take their chances with whatever price prevailed at the moment. The difference could have been as much as $50 or even $70 in a single hour. Some dealers even refused to buy any gold or silver. Their inventories were already bloated, and the mercurially changing prices for bullion made it extremely risky to take in any more of the metal.

Quite a few jewelers have been stung. The replacement cost of their inventories has risen dramatically, but not many shoppers have been willing to buy at the new prices. Because carriage trade customers continue to splurge, Cartier, Tiffany and other top-line stores are not suffering, but the rest of the retail business has fallen off badly. Laments Terry Weinshank, vice president of Delage Jewelers, a supplier to 500 stores throughout the Midwest: "The retail jewelry business is dying right before our eyes. In the last couple of weeks we have seen six of our customers close up, and more will follow."

The squeeze is equally apparent in other countries. Shop after shop in Taxco, Mexico, the silversmithing capital of the world, has closed. Artisans and craftsmen have been idled by the exploding cost of silver and the reluctance of tourists to pay the exorbitant prices. In Paris jewelry retailer Robert Edery confesses: "People just aren't buying. We have not done any real business in months."

The curbstone explanation for last week's bizarre price swings was the continuing crisis atmosphere in world affairs. But traders seemed as confused as anyone about the market behavior. Said one Zurich banker: "It's crazy. Everyone is acting on instinct, and buys or sells according to his feelings that day."

The slump was caused mainly by a spreading awareness that gold's value had been rising too high, too fast, and that some retrenchment was inevitable. Markets had been jumpy from the moment trading began on Monday morning. The first selling wave came that afternoon, when the New York Commodity Exchange curbed investors from buying or selling new contracts for the future delivery of silver. Later in the week, the Comex took a somewhat similar action on copper futures.

The Monday move was intended to cool speculation, as well as prevent what market analysts suspect might be an attempt by a small number of ultrarich investors, operating anonymously through foreign banks, to "corner" the world market for silver. One much mentioned speculator in this context is Dallas Megamillionaire Nelson Bunker Hunt, though he insists that he has no such intention. The corner would occur if the investors could buy so many silver future delivery contracts that they would wind up with enough of the metal this March to manipulate world prices.

Though the exchange's Monday action was intended to hold down prices only for silver, jittery investors assumed that gold trading would be restricted next by the exchange, and as Monday drew to a close the selling began. Unaware of the pressure that had built up overnight in New York, investors in Hong Kong, the first market to open for business on Tuesday, continued to bid up both gold and silver. But prices on the London and Zurich markets, which opened hours later, plunged. The slide was accelerated by West German bank supervisors, who ordered banks in that country to limit their investment in bullion and other precious metals to no more than 30% of the net asset value of the shareholders' equity. Thus some big West German banks, such as Dresdner and the Commerzbank, eventually might be forced to sell some of their huge gold and silver holdings, thereby helping to depress the price.

In the U.S., the Tuesday sell-off gained momentum when the Chicago Board of Trade took emergency actions like those ordered earlier by New York's Commodity Exchange. Yet before Tuesday was out, buyers were rushing back in to take advantage of the "bargain" rates of $680 for gold and $34 for silver, and the metals began rising all over again. Said Les Edgar, chief bullion dealer at London's Sharps, Pixley Ltd.: "It's a casino business now, and people are playing it that way."

By Thursday, the casino was in such chaos that dealers found it almost impossible to do any trading. In a desperate effort to dig out from under the mountainous paper work, the Swiss Gold Pool, which comprises that nation's three largest commercial banks, voted to shut down all trading in gold both Thursday and Friday afternoons. No one seemed to have a guess whether the price in Zurich would shoot through the roof or plummet through the floor when the Swiss market reopens for full and unrestricted business this week.

The real lesson of the week's gilt-edged gyrations was that, whatever its lure as a psychological security blanket, gold ultimately can be one of the least reliable stores of value anywhere, especially in times of economic and financial turmoil. That hardly seems a description of the sort of investment that anyone would seek out even in the best of times.

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