For All the Gold in Fort Knox, It May Not Be Worth Keeping

Requiem For a 'Relic'?

Gold - once the ultimate symbol of financial security and still a basic holding of many national treasuries - is slowly sliding from its hallowed place.

The latest blow came last week from an unlikely source - Switzerland - which still uses gold to back its currency. An official panel recommended selling more than half of the nation's gold.

The Swiss are not alone. More and more countries find gold to be a "barbarous relic," as the late economist John Maynard Keynes put it, and are selling off their gold hoards.

And during last week's turmoil in financial markets, gold lost its shine as a haven. Its price fell to the lowest in 12 years, or $307.50 an ounce on the spot market. During the 1987 stock market crash, gold's price jumped. But this time, investors fled to other investments.

Now even gold boosters such as Mark Johnson, manager of the $100 million USAA Gold Fund in San Antonio, says the prospect of higher prices for gold is "fairly grim."

All this doesn't mean a gold necklace is now a bargain. Gold still has value as a material.

Demand by makers of jewelry, dentists, and industry slightly exceeds the supply from mines around the world, but reductions in above-ground gold stores have so far made up the gap. Still, the experts see declining gold prices ahead.

"Gold," says William O'Neill, director of commodity research at Merrill Lynch & Co. in New York, "has over the course of recent years shown evidence it is no longer seen as a vehicle for a flight to quality."

Last week, stocks prices for South African gold mines were down 6.4 percent and gold mutual funds in the US plunged 8.43 percent, according to the Lipper Mutual Fund indexes.

South Africa, the world's largest producer of new gold, will be hardest hit: "They will clearly have to shut a number of mines," says Mr. Johnson.

Certain high-cost gold mines in Canada, Australia, and elsewhere are likely to close too.

Stock prices on the Sydney stock exchange fell sharply early last week, especially gold-related stocks. The Swiss action "may encourage other central banks or other holders to liquidate or shrink their stocks," says Johnson.

With inflation under better control, a number of central bankers have decided to shrink their gold reserves, selling them for assets that provide a return - often US Treasury instruments.

Gold gives its owners no interest. Further, it is expensive to store safely. And though traditionally regarded as a rock-solid store of value, it has in fact declined in value. In September 1987, it was worth $459 an ounce. Today an ounce sells for around $310, a third cheaper. That doesn't take account of inflation.

"It is a lousy investment," says Stephen Salant, an economist at the University of Michigan in Ann Arbor. He proposes that the US should dispose of its Fort Knox gold.

Though agreeing that gold is at present a "bad investment," Brian Wesbury, chief economist of Griffin, Kubik, Stephens & Thompson Inc., a Chicago brokerage house, maintains that gold could come into its own again if inflation renews. "I would hate to overreact and assume we are going to be always perfect in monetary policy," he says.

BUT keeping monetary gold is a costly decision, says Salant. He calculates that the US Treasury has lost tens of billions of dollars by not selling all of its gold in 1979. From May 1978 to April 1979, it sold small amounts of gold each month. The lowest average auction price was $220 an ounce. Today, the price of gold is about $310. However, just to keep up with inflation, the price would have to have risen to $475 an ounce. Many investments have done better than inflation. If the $220 proceeds from the sale of an ounce of gold in 1979 had been put into Treasury bills, it would have grown to about $780 by now.

Salant, Dale Henderson, a Federal Reserve Board economist in Washington, John Irons, and Sebastian Thomas calculated that if the nations of the world sold or loaned their 1.1 billion ounces of official gold now - rather than waiting to sell it in 20 years - they would improve their return by $128 billion. US gold stocks amount to a quarter of that total. So Washington would be $30 billion ahead.

The Fed released the paper in June. But, says Salant, it will be up to the Treasury and undoubtedly President Clinton to decide whether the US enters the gold market again. Most analysts see that as unlikely.

But O'Neill and other analysts expect some European central banks to dispose of more gold, partially to put their books in better order for the launch of a single currency for the European Union.