Despite intervention efforts by the central banks of West Germany, Japan and Switzerland to hold back the rise of the U.S. dollar, the American currency swept ahead yesterday to new international heights, while gold continued to hover around the lowest prices in three years.
The dollar scored historic new peaks compared to the Canadian dollar, the franc and lira, hit a five-year high against the pound and a two-year high against the yen.
Gold closed in London at $308 an ounce, up a bit from $305.25 Thursday. But it was still far off last Friday's close of $325.25. Brookings Institution guest scholar Edward M. Bernstein pointed out yesterday that the purchasing power of gold, as measured by the U.S. wholesale price index, has fallen to about the 1979 level.
Surging American interest rates and an improved inflation situation are credited by most market observers for both the rise of the dollar and the weakness of gold.
At a luncheon meeting with Washington Post editors and reporters yesterday, Treasury Secretary Donald T. Regan emphasized the administration's success in controlling inflation. Citing not only the decline in gold but in "the other normal inflation hedges" such as paintings and jewelry, Regan said: "The only people who still have a fear of inflation are the money markets."
The secretary added that the United States, which intervened in the exchange markets on Monday, selling dollars to help stabilize the franc and lira, have not intervened since.
He explained that the market appeared "disorderly" on that day, not only because the franc and lira had been devalued within the European Monetary System, but because of anxieties over the Israeli invasion of Lebanon "and the end of the Falkland Islands affair."
But for the rest of the week, although European currencies continued their slide, "the dollar . . . has not been strong in a disorderly fashion," Regan said. "This is a mainstream that is moving, but there isn't a choppiness on the surface."
Clearly, Regan did not see things the same way as French President Francois Mitterrand, who was quoted by United Press International as blaming "egotistical" U.S. interest rates for crippling Europe's economic growth.
On gold, Regan noted that "one of the great gold bugs, James Dines, sent out a telegram telling everybody to sell all their gold and silver, predicting, in other words, the end of any rise in the price of gold from now on."
Gold hit a peak of $875 in January 1980, a price that Bernstein says in an analysis for Bache & Co. "was beyond any economic justification. The magnitude of the fall reflects the emergence of economic criteria for the price of gold. The dollar has appreciated 30 percent relative to the Swiss franc since January 1980, and even more relative to the" mark.
Bernstein pointed out that the sharp upturn in interest rates now makes it very costly to hold gold, noting that even the Falklands war--which in another era might have triggered speculative buying of gold--had little effect on the price.
"This must make the ordinary investor skeptical whether the return from a rise in the price of gold in the future is likely to exceed the return from stocks, bonds and other savings assets," Bernstein said.