Gold's Standard: $1,000

Key Futures Contract Briefly Breaches Mark; An '80s Feel to Trading

By ANN DAVIS

March 14, 2008; Page C1

Gold hit a grand, at least a key contract did -- but like oil's first run at the century mark, it didn't sit there long.

The most-active futures contract on the metal hit an intraday high of $1,001.50 a troy ounce yesterday as the dollar plumbed fresh lows, inflation fears ran wilder, oil soared and other investments continued to hold lackluster appeal.

The contract, for April delivery, closed at $993.80 on the Comex division of the New York Mercantile Exchange.

The benchmark, nearby-month contract for March, no longer trading heavily, never broke the $1,000 mark and settled up $13.50, or 1.4%, at $992.30 -- a Comex settlement high. Gold is up 19% for the year to date.

The latest sprint started about three weeks ago amid dour news about job losses, the deepening funk in U.S. real-estate and credit markets, and the Federal Reserve's determination to fight these economic ills before tackling rising inflation.

An added push is coming from oil, which has soared this year despite recession fears, closing up 41 cents, or 0.4%, yesterday at $110.33 a barrel, a Nymex record. As with gold, investors are snapping up oil as its value, denominated in dollars, moves up as the greenback keeps sinking.

The gold market hasn't been this heated since 1980. Then, as now, inflation was rearing its head -- at nearly 14%, compared with today's rate of 4.3% -- and the dollar was diving in value and losing its appeal as a world currency. Prices for an array of energy and industrial commodities were hitting records, and investors were pulling out of traditional markets to hoard precious metals.

"In 1980, you had extremely hostile economic, political and financial conditions. You have them again today. In some cases, the conditions are worse today," said Jeffrey Christian, managing director at CPM Group, a precious-metals-research firm that publishes the widely watched Gold Yearbook, an annual report on the gold market.

The U.S. budget deficit and debt have become much larger since then. Also, the U.S. dollar turned around in 1980 and began a long period of strengthening. Now, many investors are more pessimistic about the American currency, since the U.S. already may be in a recession and the Federal Reserve is one of the only major central banks cutting interest rates. Yesterday, the dollar fell below the psychologically key 100-yen mark in intraday trading for the first time since 1995.

In other ways, today's economy is more benign. Inflation, for one, is far lower.

But many investors believe comparatively lower inflation is a key reason why gold and silver have a lot of room to run. Gold is still less than half its inflation-adjusted peak on Jan. 21, 1980, of $2,239.67. Silver's nominal peak of $48.70 in January 1980 still isn't close to being breached and amounts to $132.13 when adjusted for inflation; it closed yesterday at $20.339 a troy ounce, up 42.8 cents, or 2.2%.

Jim Estipona, a 45-year-old software-services entrepreneur in Iowa, made his inaugural gold purchase last week. "I looked at gold when it was close to $900 and thought it might be too late. Then, it went above $900, then above $950. I said, 'I'd better do something.' I bought my gold at $969." He now has roughly 10% of his assets in gold.

Through the centuries, this untarnishable metal has had a mesmerizing appeal as a show of prosperity, display of beauty and sign of greed.

Europe long used gold as a basis for its monetary systems. In the 1800s, Britain, followed by Europe and later the U.S., took additional steps to peg their paper currencies to a set amount of gold. Central banks began abandoning the gold standard in the 1930s, in part because countries in economic crisis experienced runs on their treasuries to convert paper to gold. In 1971, President Nixon abandoned a fixed gold-dollar conversion price and let the dollar float freely against other currencies. Gold's 1970s bull run was followed by a crash in 1980.

Because gold has few industrial uses -- small amounts are consumed in dentistry and electronics -- it occupies a peculiar place in today's commodities bull market. Unlike copper or oil, almost all gold that has ever been mined is still around, in jewelry or bars stored in vaults.

Total available supply of gold rose 6.2% in 2007, according to CPM's Gold Yearbook. Although new mine output is dropping, high prices led more people to sell scrap such as old jewelry. Central banks also have been selling large volumes of gold, boosting supply.

Yet investors are once again grasping at gold's value in record numbers, ignoring predictions of another crash. Wall Street has created ever-easier gold-investment tools such as exchange-traded funds; such funds trade like a stock, and shares are backed by physical gold.

Peter Schiff, president of Euro Pacific Capital, a brokerage in Darien, Conn., that advises individual investors on non-U.S. and non-dollar-denominated investments, said he sells about $10 million of gold coins a month, compared with a couple hundred thousand dollars monthly in 2002 and 2003. He also said he is doing a brisk business helping investors purchase available gold at the Perth Mint in Australia.

Jon Nadler, a gold analyst with Kitco Bullion Dealers Montreal, which runs a gold-information Web site, defected from communist-controlled Romania in 1972 with gold coins sewn into his clothing. His stash allowed him to pay for his U.S. education.

But he said gold bugs who hoard gold to the exclusion of other assets, predicting prices will reach $4,000 or $5,000 an ounce, are missing the point. The financial system would have to break down for gold to rise to those levels. It would "mean complete ruin for everything you own," he said, in which case "you'd better invest in lead, for bullets."

--Carolyn Cui contributed to this article.

Write to Ann Davis at ann.davis@wsj.com

Original Source: http://www.emailthis.clickability.com/et/emailThis

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