Alternative investments -- as most everything outside the traditional stocks and bonds markets is descibed -- came into the mainstream during the 1970s, largely as a result of persisting inflation.
Indeed such investments helped institutionalize inflation by siphoning capital from the stock market, which provides industry the necessary money to grow and increase output, and putting it into short-term speculative investments, which usually make more money than common stocks but do nothing for productivity.
And increased productivity is the key to reduced inflation.
Stock brokers have been warning recently that gold is overpriced and could drop, causing huge losses for buyers at the top of the cycle.Charles R. Provini, senior vice president of Deak-Perera in Washington, disputes the chartist's approach to gold, reasoning its price is not a function of the buy-and-sell market but the result of international emotion.
The more people become disturbed by dramatic events such as those in Iran and Afghanistan, the more they will attempt to sell dollars for gold. And most buy them to keep, rather than to trade.
Provini said he would be surprised if the gold reached $1,000 an ounce this year, but added it is not totally impossible if the international scene gets much more tense. On the other hand, any good news, such as an announcement that the consumer price index rose less than expected, acts to depress the metal's price temporarily. Only if the country makes significant progress in reducing inflation, the balance of payments and the budget deficit will the price drop definitively.
James Sinclair, one of the original "gold bugs," predicts that gold already has reached its high for the first half of 1980 provided there are no more political setbacks of the magnitude of Iran, Afghanistan and huge rises in oil prices.
However, if further disruptive events occur, he foresees that the price will rise to within $925 and $975 by June. On the downside, he sees gold in the $485 to $495 range. Similarly with silver, Sinclair feels that the high for the first two quarters was reached in the first two days of trading in 1980 when it reached $44. Sinclair's worst-case scenario, also based on political upheaval, calls for a price of between $52 and $57. His support level is between $21.40 and $25.70.
As for foreign currencies, the West German mark is enjoying the fastest appreciation of any, largely due to the Iranian situation. If the international situation worsens, Sinclair predicts that the mark and the Swiss franc will reach par with the U.S. dollar in six months. Whereas not many years ago an American could exchange one dollar for four marks and today gets 1.7, he soon may get just one mark.
The Japanese yen should stage a recovery, rising to 200 to the dollar from its current level of 224. And the pound sterling, now trading at $2.14, will rise to at least $2.31 during the period.
Money market mutual funds can be expected to continue their spectacular growth, whether interest rates decline or not, according to William Donoghue, publisher of the Money Fund Report and unofficial spokesman of the industry. During 1979 total assets increased from $10 billion to $46 billion. The number of funds increased from 56 to 90, with 19 of the 90 holding half the assets and having been extablished by brokerage houses.
Donoghue predicts total assets of money market funds will rise to $100 billion by the end of the year. One principal objection to these funds has been that the client's money is not insured. Congress will hold hearings later this month on whether to put reserve requirements on money market transaction accounts similar to those on financial institutions.
Instead of reducing money market funds operations, Donoghue feels it would be the "biggest endorsement they could get." He claims a 3 percent reserve on all accounts with six or more transactions a month would result in a drop in the yield of only 1.7 basis points. And total assets would climb to $150 billion next year.
Whereas the 1970s proved to be a rather dismal decade for common stocks -- at least until last year -- it was anything but dismal for options on those underlying stocks. Trading increased from 1.1 million contracts in 1973 to nearly 60 million last year. And the future looks even brighter, especially because the Securities and Exchange Commission is expected to lift its moratorium soon on additional options that can be traded.
Another phenomenal growth area during the 1970s has been the commodity futures market. (An option is a right to buy or sell at a given price; a future is an obligation to buy.) The Futures Industry Association estimates 11.5 million contracts were sold in 1970 and 77 million in 1979. Whereas once this was the province of farmers and agricultural wholesalers seeking to protect themselves against bad crops and price drops, the market has been invaded by speculators who wouldn't know a soybean from a kernal of corn.
And whereas it was once primarily agricultural, the futures market now enjoys great activity in gold, other metals and financial futures, contracts which allow the holder to bet on swings in interest rates. Trading in these has increased 200 percent since 1978. Since the middle of the decade, 14 types of financial futures have been developed, the most popular of which are Ginnie Maes (based on Government National Mortgage Association certificates), 90-day Treasury bills and 15-year Treasury bonds.
With applications for eight more financial futures on file at the Commodity Futures Trading Commission, including contracts in Eurodollar and U.S. certificates of deposit and loan repurchase agreements, it appears these will become even more important investment instruments if high inflation continues into the 1980s. Yet because these highly leveraged transactions offer the potential for great losses as well as great profits on very small shifts in interest rates, margin requirements recently were increased to protect inexperienced speculators.
Other types of futures contracts reflect the current situation as well. The New York Mercantile Exchange already is trading futures in home heating oil, and Business Week magazine foresees commodity futures in coal, electricity and uranium. Also in the offing, says that publication, are stock index futures, commodity options, commodity mutual funds, mortgage participation securities for small investors (now sold only in large denominations), more limited partnerships in ownership of property, and more interest in tangibles such as art and antiques.
A growing number of investors reason that things can provide the security not found in money investments. Salomon brothers calculated that rare or precious objects such as Chinese ceramics, books, stamps and gold comfortably outpaced both the stock market and inflation during the 1970s. It is sometimes said their market is recession-proof by virtue of the fact that they are customarily bought only by the wealthy, whose incomes do not suffer that much during an economic slowdown. Bob Salomon disputes this belief, noting that auction prices of Chinese ceramics, as an example, took a nosedive in 1974-75. He warns that prices again could be affected this year by another recession.