Wednesday, July 7, 1999 | 11:19 a.m.
The old saying that a fool and his gold are soon parted has been replaced by warnings you'd be a fool nowadays not to part with your gold.
Prices on both cash and futures markets tumbled Tuesday to new 20-year lows after Britain kicked off the first in a series of auctions that will eventually lead to the sale of more than half its reserves.
The move, previously announced in May, is the latest in a series of high-profile central bank sales that come as gold loses its luster in favor of better-returning investments.
"The only good thing gold has going for it is the fact that it has so few friends that people may become interested in it," said Bernard Savaiko, director of futures research at PaineWebber Inc. in Weehawken, N.J.
"But in order to see a sustained rally, investors are going to have to return to the market in a big way, and that's a tough sell with the great strength in competing assets like the stock market," he said.
Gold for August delivery fell $6.80 to $257.30 an ounce on the New York Mercantile Exchange. Spot gold prices in Europe hit a 20-year record low at $255.75 a troy ounce. In London, the gold price closed at $256.10.
In an ominous sign that prices will continue lower, the British sale -- which amounted to 50,250 pounds, or 3.5 percent of the United Kingdom's total 1.6 million-pound reserve -- did not attract higher prices despite heavy bidding.
"The fact that the gold was sold at the lowest accepted prices was not particularly positive," said Refco metals analyst James Steel.
The British Treasury said it was selling gold to buy U.S. dollars, Japanese yen and the European Union's new euro currency to create a more balanced cash reserve.
The World Gold Council, which represents the mining industry, campaigned against the sale in national newspaper advertisements, gathered a petition with 10,000 signatures and called the auction "a disaster."
Gold, traditionally a safe haven for investors in times of turmoil, peaked at $875 per troy ounce in January 1980 -- a time when Soviet troops were moving into Afghanistan, the U.S. inflation rate was in double figures and oil prices were rising rapidly.
Many nations are no longer interested in making payments to each other and backing their currency with 27-pound gold bar, though it still has a large role in industrial and ornamental settings.
In an era where electronic commerce is moving the world toward a paperless currency system, countries such as Argentina, Luxembourg, Australia and Canada now believe they can maintain economic confidence by buying other investments that do not cost as much to hold and appreciate in value faster.
"The bottom line is the demand that's out there for jewelry and other industries is not enough to stem the tide," Savaiko said. "Gold pays no return at a time when real returns are moving higher and inflation still doesn't pose a threat."
A ray of hope for a price rebound, however, is that jewelry manufacturers typically begin buying gold in July and August for the November-December holiday shopping period. Manufacturers could purchase in heavier-than-normal quantities in anticipation that consumer demand would spike as some of the cost savings are passed on.
"We will be able to offer the consumer for the holidays some very, very sharp values on some pieces," said Beryl Raff, president and chief operating officer of Zale Corp. Zale is the largest jeweler in North America, with 11,175 stores.
Prices of 14K gold pieces such as chains, which cost little to make, are likely to see the steepest discounts, Raff said.
Gold prices are unlikely to recover significantly, analysts said. Switzerland and the International Monetary Fund are moving to dispose next year of part of their holdings. The IMF sale, however, must receive U.S. congressional approval.
The recent gold sales have struck South Africa, the world's biggest gold producer, particularly hard.
Kelvin Williams, executive director of South Africa's Anglogold, the world's single-largest producing company, criticized the UK's plan to continue its auctions once every other month.
He said pre-announcing a sale leads to high volatility as speculators sell ahead of the auction and buy at lows afterward.
"The Bank of England has chosen the method that has been most disruptive to the market," Williams said on a conference call after the sale. "This is an inappropriate way to sell monetary assets in any shape or form."
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