War fears in the Middle East, turmoil in Eastern Europe, the Soviet Union on the brink of disintegration, rising inflation, soaring oil prices.
Gold bugs should be in heaven: These are exactly the kind of gloomy conditions they've been hoping for.
There's just one problem. Gold has stubbornly refused to play out its historic role.
The day after Saddam Hussein's tanks rumbled into Kuwait, the price of gold closed on the Commodity Exchange in New York at $377.40 an ounce. Three weeks later, it had jumped to $415 an ounce. But by Wednesday, even though war is still a real possibility, the price had dropped back to $378.90.
What's going on here?
Gold's glory year in recent times was 1980, when the precious metal soared above $850 an ounce, propelled by rising inflation and oil prices and the hostage crisis in Iran. Gold prices also benefited from the buying spree that began in the mid-1970s when the $35-an-ounce fixed price was eliminated and, for the first time in memory, Americans were allowed to own gold.
But gold investors hoping that history will repeat itself may be in for a disappointment. There are some factors that bode well for modest price increases in the '90s, but the conditions under which gold would soar -- a good heavy dose of worldwide hyper-inflation -- aren't apparent.
"Gold has lost a lot of its glitter since the early '80s," said Randolph L. Donney, head of commodity research for Pegasus Econometric Group in Hoboken, N.J. It isn't reacting as many expected in the current crisis, he said, "because there are now so many other markets and so many other ways to hedge against a war. Gold is seen as a weak alternative."
According to Salomon Brothers Inc.'s 1990 annual survey of asset performance, gold ranked 13th out of 14 categories in terms of compound annual rate of return over the last 10 years, actually losing 4.3 percent a year in value. The only investment that performed worse was silver. Stocks and bonds were the stellar performers of the booming '80s.
But the same survey reveals that, over the last 20 years, gold would rank fifth in overall performance.
At a recent seminar aimed at institutional investors, gold advocates tried to convince a somewhat skeptical audience that gold has its place in an institutional portfolio, say, 5 percent to 10 percent of the total. Those who advocate gold for individual investors make the same argument.
Roger Ibbotson, a Yale School of Management professor, told the seminar that gold should be viewed in a portfolio as insurance.
"The case for gold has to rest on diversification gains, not on average return," said Richard C. Marston, professor at the University of Pennsylvania's Wharton School. His studies showed that investing 10 percent of a portfolio in gold reduces risk and doesn't hurt return.
Admitting the difficulty advocates have in persuading investors who have been burned on gold during the last 10 years, James P. Hildebrandt, vice president for the World Gold Council, said: "Gold is both money and a commodity. It acts one way when it's money and another when it's a commodity. Gold didn't hold its advances like oil because traders have short-term horizons. In the short term, gold often behaves as irrationally as any commodity."
And as with any commodity, gold prices are a function of supply and demand as well as psychological market factors. Unlike the price, the supply of gold soared in the 1980s. Freeing gold from its fixed price in the '70s prompted a rapid growth in mining operations worldwide. New gold mine capacity in the western world increased 74 percent in the '80s, said Hildebrandt.
Some of those mining operations are marginal performers and will likely be closed in the '90s, thus slowing new production. Prescott Ball & Turben in Cleveland has forecast that world gold production will peak in 1992.
Supply surged in the last decade, but so did demand. Said Hildebrandt, "Countries around the world have liberalized their policies on gold ownership."
The growth area for gold demand has been jewelry, which accounted for 30 percent of the gold mined in 1980 and 66 percent of new supply in 1989.
Central banks around the world hold about 36 percent of all gold reserves, a figure that hasn't grown in recent years. That may reflect the fact that "attitudes of central banks toward gold may be changing," said Richard Scott-Ram, the gold council's chief economist.
Kaplan believes investors should put a percentage of their portfolios in gold because "the downside is limited" and investors would be better off buying it now than "when inflation is on the cover of Time magazine" and gold prices are skyrocketing.
But Donney disagrees. "Central banks have become staunchly anti-inflationary and I think that trend is going to continue," he said.