Gold, a traditional refuge in times of monetary uncertainly, soared in world markets yesterday above $200 an ounce for the first time in history, while the dollar continued to slump against the yen and European currencies.
The gold price in London jumped to $201.375 an ounce, from the previous day's $194.05, a sharp one-day rise of about $7.25 that adds up to a phenomenal rise of 22 per cent since the end of last year. In a period of a little over two years, the price of gold has now risen about 50 per cent, far above what officials had predicted or believe is warranted by economic conditions.
Gold at $200 an ounce breaks through a pyschological barrier than was resisted even during the speculative burst at the end of 1974, when the yellow metal hit a high of $197.50. That was just before Congress allowed U.S. citizens to buy and sell gold for the first time since the 1930s.
But the boom that "gold bugs" predicted would bring the price to $300 or $400 an ounce never materialized. In mid-1977, gold had slipped as low as $143.00 an ounce.
Traders yesterday pointed to the sharp increase in U.S. inflation rates and a consequently weak dollars as the main factor in the new upturn in gold prices.
But the price of gold has jumped even more sharply, than the decline of the dollar against other currencies a phenomenon that experts were at a loss to explain with precision.
"It's reflective of a flight to what some speculators and others perceive as an anchor, or haven, but there's nothing much that we could or should do about it," a high U.S. official emphasized.
The specific excuse that traders latched onto to explain yesterday's rise was a statement by Swiss national bank President Fritz Leutwiler that the dollar would continue to decline against the Swiss franc because of high American inflation rates.
That was enough, coupled with the third straight monthly rise of 0.9 per cent in the consumer price index that maintains a double-digit inflation pattern for the year so far, to stir hectic activity in gold.
Conincidentally, despite reportedly heavy purchases by the Bank of Japan, the dollar closed at 190.25 yen in Tokyo, the lowest level since the end of World War II.
Here, American authorities are confronted by a problem in public understanding. The changes in the dollar-yen relationship are not so much a matter of American weakness as Japanese strength.
The real story is that the yen is appreciating against the dollar because Japan is continuing to pile up massive world-wide trade and current account surpluses. Despite Japanese efforts to reduce those surpluses it appears that they will grow instead of shrink this year.
"What we're experiencing is a break-out of the yen," a Federal Reserve official said, "and you can see that the yen is up against all currencies."
When the yen goes up, the dollar goes down. More or less in a sympathetic pattern, the dollar also dipped against most European currencies yesterday after having been steady for most of the past week.
But high officials said that U.S. policy had to be geared to stronger efforts on the anti-inflation front at home, coupled with a drive to boost exports so as to reduce the oppresive trade deficit.
They ruled out "pallistives," like more strenuous market intervention moves designed to boost the dollar rate in world markets.Intervention will continue on a regular basis only when necessary to smooth out disorderly markets, officials said.
One underlying factor for the gold strength and the dollar weakness in Europe is the expectation that current economic policies of the Carter administration will do little to spur economic growth or mitigate the rate of inflation.