Great gold bust!!! of 1976

To hoarders and speculators, gold lately has had about as much luster as a rusty tin can. In the 19 months since gold purchases became legal for U.S. citizens, the price has fallen more than 40% from its peak of $198 an ounce. In three chaotic days of trading last week, gold fell $14 on the London market, reaching a 31-month low of $105.50 an ounce. Though the price recovered to $111 by week's end, that is still a dismal figure for goldbugs, who not long ago were forecasting prices of $300 or more.

What has taken the glitter off gold so suddenly? One major factor is that the U.S. has been relatively successful in its campaign to remove gold from the international monetary system. Last year the U.S. persuaded other countries, including a reluctant France, that the International Monetary Fund should auction off one-sixth of its gold hoard, or 25 million ounces. Meanwhile, the economic conditions that triggered the gold boom of 1973-74 have largely disappeared. The dollar is steady, world inflation rates have come down and the general panic set off by the oil crisis has abated. All those trends reduce the distrust of paper money that moves many speculators to put their funds in gold.

Thus, when the IMF held the second in its series of gold auctions two weeks ago, it got a mere $122.05 an ounce. Two days later, the London price dropped below $120—a point at which traders thought government banks would start buying gold to prop up the price and protect the value of their own stocks. But the central banks stayed out of the market, and when it became obvious that they would not support the price, panic selling hit.

The gold bust is bad news for developing countries. The IMF puts the profits from its gold auctions into a special trust fund to aid poor nations; now the trust fund will be leaner than expected. The price collapse also poses problems for countries like France, Italy and Portugal, which hold a large proportion of their monetary reserves in gold.* It is even embarrassing to West Germany, which two years ago lent $2 billion to Italy against gold collateral—valued at what then seemed a ridiculously low $120 an ounce.