Quick Gold Price Surge
Jude Wanniski
February 4, 2000


GOLD POP: Today's quick $24 per ounce gold-price surge above $310 is being interpreted in some quarters as finally corroborating Fed Chairman Alan Greenspan's fears of resurgent inflation. But with the dollar showing no signs of weakness in foreign exchange markets, and the Treasury yield curve remaining in deep inversion, we can find no immediate confirmation for gold signaling a generalized weakening in dollar purchasing power. Indeed, gold futures trading in rare backwardation against the spot price during most of the session suggests the move can probably be explained as a transitory short-covering rally. Our best guess is that the impetus for the move is tied to this week's explosive long bond rally, which caught several major hedge funds with big wrong-way bets. Taking short positions in gold has been a favorite source of cheap financing for some of the largest hedge funds. With their bond positions under water and facing mounting margin calls, the funds likely were forced to cover their gold shorts to raise needed cash. We will watch gold carefully, though, for signs there may be a surplus of liquidity in response to the Fed's interest-rate increases and hints of more to come. If this is the case, gold and oil will begin the convergence to their traditional ratio, a convergence we believe is inevitable. In one troubling scenario, the Fed would view gold's rise as inflationary and continue raising short rates to slow the economy further.