Market Watch : Accounting for Gold’s Peculiar Behavior : Precious metals: The old maxim about its allure in hard times isn’t holding up for various and complicated reasons.

Investors once believed that gold gleamed brightest in bad times.

When the dollar was weak, gold was strong. When the economy was bad, gold was good. When inflation was rising and other investments were headed into the dumper, gold prices soared.

And it certainly headed up when war was on the horizon.

But the current performance of gold is shattering all those long-held illusions. The dollar couldn’t get much weaker. The economy is slowing and may be headed into a recession. Inflation is rising. And the U.N. Security Council recently agreed that the use of force might be necessary to solve the Persian Gulf crisis.

Nevertheless, the price of gold is languishing.

“Gold has certainly not reacted the way people hoped and prayed it would,” sighed Bruce L. Kaplan, president of Kaplan & Co., a precious metals consulting firm in Santa Monica.

Indeed, early this year, investment experts were extolling the virtues of gold, maintaining that inflation and a souring economy would cause gold prices to climb rapidly. The metal, then selling for about $412 an ounce, would soon hit $500, several industry experts said.

Yet on Friday, gold closed at $372.08 an ounce. And, says Kaplan: “I don’t expect any significant upward moves this year unless something unprecedented happens.”

What tarnished gold’s luster?

First there was the “dis-hording,” gold experts said. At least twice this year, Middle Eastern investors--who historically have been big gold buyers--became big sellers. They sold enough gold, in fact, to depress prices.

“They were selling off large chunks of gold at market prices without worrying about the effect on the market,” said John Nadler, vice president and precious metals specialist at BankAmerica Corp. in San Francisco. “Normally, astute traders don’t do that.”

There was also some liquidation by investors in the Far East, who typically buy and hold the commodity.

Exactly why all this selling took place is something of a mystery, Nadler said. Traders speculate that the Japanese may have had to sell gold to meet margin calls when the Japanese stock market plunged earlier this year. The Middle Easterners might have been raising cash for their military effort, or they might simply have been speculating, traders said. It’s anyone’s guess.

Nevertheless, selling from these normally stable quarters hurt the credibility of the gold market, according to Nadler.

Meanwhile, the U.S. economy was not slowing down as quickly as everyone expected. Even though economists have been predicting a recession for more than a year, the nation has yet to report the required two consecutive quarters of negative economic growth. Moreover, although inflation is clearly rising, it has yet to reach the heights that would spur a buying frenzy in the gold market.

As for the prospects of war, the United States and Iraq are preparing to talk. And it seems as if most other world leaders are comporting themselves in a level-headed manner, which makes the rest of the world seem like a more peaceful place.

But the biggest drag to the price of gold may be simple oversupply.

Gold production has soared during the past several years, said James P. Hildebrandt, vice president at the World Gold Council in New York. In 1989, U.S. miners produced 259 tons of gold, compared to only 30 tons in 1980. Australian producers put 197 tons on the market in 1989, compared to 17 tons in 1980. And production in Brazil and Canada has also tripled in the past decade.

Demand for gold has also been rising--primarily for jewelry, Hildebrandt said. But it has yet to outpace supply.

Nevertheless, Hildebrandt maintains that this abundance of supply is about to dry up. Many of the Western gold mines are becoming less productive. And a tax change in Australia probably will reduce interest in gold mining there, he said. Other technical factors will also play a role in reducing future gold supplies, he added.

Hildebrandt, however, refuses to predict when or if the constriction of supply will start to affect gold prices.

Gold is a long-term investment, not a short-term speculative play, he said. Perhaps the dueling demons of war, inflation and recession will eventually rise up and send the gold market into a rally. Perhaps not.

The only thing that’s certain, Hildebrandt said, is that gold generally does preserve its purchasing power in the long run, making it a good investment for those needing an inflation hedge. And in times of economic and political uncertainty, an investment that promises to at least maintain its value might look bright after all.