Wall Street History

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Wall Street History

12/16/2005

Gold Rush

[Next WSH posted by 1/1/06...the ''05 numbers]

With gold’s recent spike to $540, intra-day, the highest level
since 1980’s all-time level, I thought we’d go back to that great
bull run in the precious metal, utilizing Peter Bernstein’s classic
“The Power of Gold,” as well as the archives of The New York
Times.

But first, to set it up, the price of gold first broke through $100
during 1973, thanks to OPEC flexing its muscles, and then from
1974 to 1977, gold generally traded in a range of $130 to $180.

In 1978, OPEC rang the bell again and gold hit $244, finishing
the year at $226. Peter Bernstein writes that “in the spirit of the
times, the famous comedienne Bette Midler, about to depart on a
European tour, demanded on July 3, 1978, that her $600,000 fee
be paid in South African gold coins instead of in U.S. dollars.”

1979 was chaotic and on 12/31/79, gold was at $524. Here’s a
snippet from the New York Times, Sept. 4, 1979:

“The price of gold jumped $8 today, breaking through the $320-
an-ounce level for the first time

“Spurred by rocketing oil prices and monetary inflation, gold
prices have risen this year by almost $100 an ounce

“Bullion dealers said that the gold price was being driven
upward faster than the market expected by a general and
persistent fear that inflation is going to get worse in the industrial
countries, and that the United States could not avoid a retraction
in its economy, inevitably weakening the dollar.”

Then in November 1979, Iranian revolutionaries took 66
Americans hostage. The next month the Soviet Union invaded
Afghanistan, setting the stage for the final super spike in gold.

Here are some random figures and opinion from the New York
Times, 1/1/80:

Shares in Hecla Mining, which traded earlier in 1979 at $5 ,
finished the year at $46.

“At Christmas 1979, Johannesburg analysts were advising clients
to sell (gold) into strength. Last Thursday, bullion burst through
$500 an ounce, more than double the $226 at the start of 1979.”

Check this out, as an aside.

“(For 1979), Big Board volume swelled to 8.15 billion shares for
an average daily turnover of approximately 32 million shares .

“Wall Street experienced the busiest day in market history on
Oct. 10 amid the rapidly rising interest rates that followed the
Fed’s stiffened credit policy. Volume amounted to an
astonishing 81.6 million shares.”

[Of course today the average daily NYSE volume is generally
1.6 billion.]

In the first two trading days of 1980, gold rose $110 to $634,
while the value of the dollar was plummeting versus most major
currencies. Peter Bernstein:

“A precious metals trader for one of the Swiss banks, in a major
understatement, told a reporter from the New York Times that
‘The market shows that people don’t trust the governments and
they don’t trust paper money either.’

“All of a sudden the central banks began to make noises about
restoring gold to its traditional role in the monetary system, a
complete reversal of recent policies of selling gold out of their
reserves.”

The New York Times, Jan. 15, 1980:

“Gold, continuing to reflect anxiety over events in Afghanistan
and Iran, surged $24 an ounce to another record in heavy
trading

“The gain, the third big one in succession brought the price to
$684 at this afternoon’s consensus fixing, more than 30 percent
higher than at the start of the year.

“ ‘Gold’s sought by all and sundry,’ said one beleaguered dealer
as he fought to keep up with customers’ inquiries and orders .

“Behind the spectacular gains of recent months is a general
flight from paper currencies to which has been added a frenzy of
speculation.

“ ‘The global money market is again issuing a vote of no
confidence to the financial policies of the major governments,
and turbulent political events in the Middle East are making
matters worse,’ said Lawrence A. Kudlow, chief economist at
Bear, Stearns & Company. ‘It is a run against paper money.’”

Peter Bernstein:

“Then Treasury Secretary G. William Miller held a news
conference at which he announced that the Treasury would hold
no further gold auctions. ‘At the moment,’ he told the press, ‘it
doesn’t seem an appropriate time to sell our gold.’ With 220
million ounces of gold stored away at Fort Knox, gold hoarding
was regaining some traditional respectability. This was a curious
observation in light of the auction of gold that the Treasury had
conducted at much lower prices since they had begun the
practice five years earlier. Most investors aim to buy low and
sell high, but the U.S. Treasury apparently was more attracted to
selling low than high: the last auction before these events just
two months earlier, had produced an average price of only
$372.30.

“Within thirty minutes of Miller’s remarks, the gold price shot up
$30 an ounce to $715. The next day it was up to $760. The day
after, gold hit $820. The manager of the precious metals
department of a New York bank specializing in the gold trade
was ecstatic: ‘Certificates, bullion, coins, bars, you name it, our
business has been very brisk. Americans are catching the gold
fever. As for the international bullion market, which represents
the bulk of our business, it’s become a zoo.’

“Not everyone was caught up in the panic. Unlike Secretary
Miller, many common citizens thought selling high was kind of a
good idea .[By Jan. 17, with the price at $760, a Times article
reported] ‘On 47th Street the dealers were predicting the price
would hit $1,000 an ounce by July, but no one seemed to be
waiting.’”

[Meanwhile, silver was also hitting new highs, $48 on Jan. 17.]

The New York Times, Jan. 18, 1980:

From an executive at Deak Perera Group, a major international
gold dealer.

“Bullion prices are being squeezed higher and higher by
continued strong demand from the Middle East on one side and
by the growing reluctance of holders of the metal to sell. Further
upward pressure on prices is coming from increasing numbers of
Americans who are buying bullion coins and ‘paper gold’ in the
form of certificates.”

With the gold frenzy, what were we buying at the bookstore?
#1 on the New York Times’ “mass market” list was “How to
Prosper During the Coming Bad Years” by Howard J. Ruff.

Gold hit its all-time high on Jan. 21.

The New York Times, Jan. 22, 1980:

“The price of gold soared as high as $875 an ounce yesterday
before dropping back by $50 or more in late New York trading

“In Zurich, dealers said gold buying was spurred by rumors that
the Russians were building up their strength in Southern Yemen
near Saudi Arabia, near Afghanistan’s border with Iran and near
Bulgaria’s border with Yugoslavia, where 87-year-old President
Tito is in poor health.

“ ‘We’re in World War Eight, if you believe the market,’ said
James Sinclair, a New York commodities broker.”

Peter Bernstein:

“Late (the afternoon of Jan. 21), President Carter announced that
the United States would have to ‘pay whatever price is required
to remain the strongest nation in the world.’ His comment
seemed to cool tempers in the gold and foreign exchange markets
– the price of gold was down $50 by the close of trading.”

The peak was in. From the New York Times, Jan. 23, 1980:

[Headline]

GOLD PLUNGES $145, RECORD FOR ONE DAY
Silver Slumps by $10, Also a Mark

“The soaring gold market plunged sharply yesterday

“ ‘It was inevitable,’ said James Sinclair. ‘A break of this
magnitude is more than a simple correction. It could signal a
period of long price erosion because professional traders should
now be supplying bullion to the market. How low can gold go?
We figure no lower than $600 or $620 before the basic political
and economic factors reassert their influence on the market.’

“Leading brokers traced the break to actions taken by the West
German central bank Monday to damp speculation in precious
metals by restricting gold and silver holdings of their member
institutions, effective Feb. 1.”

The New York Times, Jan. 25, 1980:

Thomas M. Timlen, acting chief executive officer of the Federal
Reserve Bank of New York, “accused participants in the foreign
exchange and commodity markets yesterday of purposely
starting rumors in order to increase their profits or cut their
losses .

“Mr. Timlen cited rumors last week that the Soviet Union had
invaded Iran as the reason that the price of gold soared to more
than $800 an ounce .

“He also mentioned rumors immediately following the
announcement last Oct. 6 of a major change in the way the
Federal Reserve conducted its monetary policy. One rumor had
it that Paul A. Volcker, chairman of the Federal Reserve Board,
had resigned; another was that he had died.”

Whatever the reason, gold flailed around and the high for the
following year, 1981, was $600. By 1985, gold was down to
about $300. And until just the past few weeks, the post-1981
peak was $486, set during the 1987 market crash.

Peter Bernstein concludes:

“The rush into the gold markets produced much the same kinds
of results as the gold rush to the Klondike eighty years earlier,
where only about four hundred people out of one hundred
thousand prospectors hit it rich. Indeed, it is ironic that the State
of Alaska Retirement System bought a ton of gold bullion in
1980 at $651 an ounce, and then a second ton at the end of 1980
for which they paid $575. In March 1983, the state sold out at
$414. Thus, the real winners at the end were the sellers – an
opportunity that the U.S. Treasury chose to pass up.”

I would conclude myself that as you follow the action in the
commodities pits today, keep in mind the lessons of history and
follow the hard news. It’s interesting that Iran was such a key
part of the equation in 1979-80 and today is once again in the
headlines in a big way because of a wacko president’s statements
and its burgeoning nuclear weapons program. Also, as you can
see from the above, world opinion on the U.S. dollar can be
critical, too.

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Sources:

Peter Bernstein, “The Power of Gold”
New York Times, various, including from reporters Vartanig G.
Vartan, Robert D. Hershey Jr., and H.J. Maidenberg, as well as
wire service reports.

Wall Street History will return on or about Jan. 1 for our year
end review.

Merry Christmas and Happy Hanukkah.

Brian Trumbore

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