Gold shrugs off Moscow crisis, brief rally stalls

Stock markets reacted negatively and the price of gold was in convulsions following the latest political turmoil in the Soviet Union which saw the reform-minded president, Mikhail Gorbachev, removed from office.

Investors around the world reacted to news of the Soviet coup by selling off their shares. The Toronto Stock Exchange dropped by 1.2%, the New York Stock Exchange declined by 2.4% and in Tokyo the Nikkei average dropped by 6%. The next day, cautious investors helped all three of the markets recover a portion of their losses.

The gold price staged a brief rally (as did the price of crude oil) when global markets opened on the Monday morning following the coup but by the end of the day the spot price of gold in New York gained only 60 cents to US$358.60 per oz. and in London (the afternoon fix) jumped by US$3.45 to US$361.20.

The next day, gold closed down in New York at US$355.90 and in London at US$353.80.

Fear of a major sale by the new leaders of the Soviet Union of the country’s gold reserves, as a means of acquiring foreign currency, was one reason given by analysts for the depressed gold price. The Soviet Union is a major producer of gold and other precious metals.

“What I find most surprising is the limited reaction of the gold price to events in the Soviet Union,” said Carlos Leitao, an economist with the Royal Bank of Canada in Montreal.

Gold’s reaction to the Soviet crisis and other world events such as the Persian Gulf war earlier this year appears to be an indication that the precious metal does not have the same appeal it used to, he said, explaining that in the past, investors tended to turn to gold in times of uncertainty. Industrial demand for the precious metal, which expanded considerably during the 1980s, is what is keeping the gold industry going today, Leitao said. One Toronto analyst said the gold price is tied to inflation and has not generally moved with political events. He suggested that during the Persian Gulf crisis the gold price moved ahead in tandem with the oil price, which soared to the US$40-per-barrel level.

The platinum price, which recently dropped below the spot price of gold, also rallied briefly, gaining US$4.80 in New York, but it too fell back on the next trading day. The silver price also advanced before falling back sharply. Oil in New York shot ahead by US$1.17 to US$22.47, then retreated slightly by the close of the next day.