'Gold rush' of 1980 sparked by turmoil in Iran, Afghanistan
Propelling the gold rush of 1980 is an international mood that has shifted from financial concern to political panic. "The world anxiety level has just taken off," says Jeffrey A. Nichols, chief economist with Argus Research Corporation, a New York financial advisory firm.
The wealthy and well-to-do, particularly in the Middle East but also elsewhere, have been frightened by the events in Iran and Afghanistan. They have been buying gold as financial insurance, shoving up the price of the precious metal to $634 a troy ounce on the London gold market at the closing Jan. 3. That was up $74.50 from the Jan. 2 afternoon "fixing" -- a record jump that smashed another record gain of $35.50 at the previous closing. Many ordinary speculators have disappeared from the market, scared by its high risks.
After examining the international monetary reserve figures of Saudi Arabia, Kuwait, and the United Arab Emirates, Mr. Nichols "guesstimates" that as much as in the last several months. Some of this "flight capital" has been invested in gold.
There have been similar, but smaller, movements into gold in markets ranging from Paris to Hong Kong.
However, the motives of gold investors have altered. They used to worry mostly about the value of paper money, particularly the US dollar. They invested in gold coins or bullion as an economic hedge against the depreciation of currencies.
Now they are concerned about political stability. Those in more moderate Middle East nations and elsewhere wonder if the Iranian revolution will spread to their homelands. They suspect that the Soviet invasion of Afghanistan may be a first move by the USSR to assure itself of access to the huge oil reserviors of the Gulf region.
James Sinclair, a well-known gold enthusiast in New York, says those investing in gold today see not just chaos and chance in the Middle East, but also cause and effect -- the results of a plan by the Soviet Union to put the oil-rich nations of that area in a pincer between Soviet-backed South Yemen and Soviet-controlled Afghanistan.
The old concerns over weak paper money are no longer so valid because the United States, Canada, West Germany, the United Kingdom, and some other major industrial nations have all turned toward tighter monetary policies. They have set lower targets for the creation of new money and are acting on them.
However, the US dollar has suffered on foreign exchange markets from the same political situation that has boosted the price of gold. The dollar declined to a record low against the West German mark Jan. 3.
One reason may be an attempt by Arab flight capital to diversify out of the US dollar as a result of the freezing of Iranian government financial assets in the US.
Notes Mr. Nichols: "We have the sheikhs folding up their tents, and packing their camels, and being prepared to follow the Shah if necessary."
Arab investors are attempting to buy assets denominated in German marks, Swiss francs, or other strong currencies, forcing up their prices on foreign exchange markets. However, gold has been appreciating sharply in value against all these currencies recently. Until a few months ago, the value of gold in Swiss francs had been relatively stable.
Will the price of the yellow metal continue to rise?
Mr. Nichols suspects it could go as high as $1,000 an ounce. Ramachandra Bhagavatula, an economist with Citibank in New York, says, "I can't help but feel that one of these days something drastic is going to happen. Its price might take a returned."
Mr. Sinclair figures gold should settle at a price between $620 and $700 a ounce. "Everything finds its price over time, including anxiety," he says. "The political extremes presently being assumed must become a reality for prices to move higher."
However, he warns that the gold market is thin, with the supply of the metal falling off sharply as few holders are willing to give up their hoards in a rising market. The price could drop fast, he warns.