Gulf crisis brings volatility back to gold prices

The gold price is proving to be extremely volatile as investors react quickly to political manoeuvering in the Middle East. In recent days, gold soared to US$415.50 as the likelihood of armed conflict in the Middle East intensified, before dropping back to US$398.40 on the possibility of a peaceful settlement. This surge in investor interest comes after relatively mild trading in the days immediately after Iraqi invaded Kuwait. Some analysts were surprised by gold’s sluggish initial reaction, given the magnitude of events in the oil-rich Arab countries. Gold is traditionally regarded as a safe haven during times of political turmoil and a hedge against the inflation that goes hand in hand with rising oil prices.

“It was a bit surprising to see gold react so slowly at first,” said Carlos Leitao, a Montreal-based mining analyst for the Royal Bank. “But it seems to be catching up now.”

Leitao said people’s first reaction to the invasion was to shelter their money in U.S. dollars, an increasingly popular refuge for nervous investors. But as the outlook for the U.S. economy darkens, people are turning to gold.

Contradicting this trend has been a wave of profit taking inspired by news that Jordan’s King Hussein is carrying a message from Saddam Hussein to President George Bush. The move by the Iraqi president has heightened speculation that a peaceful solution for the Middle East crisis may be in the works.

“A lot of people were hurt very badly by gold back in March and April, so there’s a lot of uncertainty and speculation out there,” Leitao said. But he is confident that the combination of a weak U.S. economy and tensions in the Middle East will keep gold “at the very least, above US$400 over the next few months.”

This is good news for the senior gold mining companies. While other issues have been hurt by the political turmoil, gold stocks have reacted positively. Some have been quick to take advantage of the new prices. American Barrick (TSE), for example, has plans to sell five million shares at $24.50 each for proceeds of $122.5 million. Others are selling gold forward in large quantities, especially from their marginal mines.

But the gold index, at about 15 times the price of gold, is not reacting as strongly as might be expected, said Richard Cohen, an analyst for BBN James Capel. “The gold index is keeping pace with the gold price,” he said. “If the market expected a lasting rise in the gold price we would see a difference of more like 18 times.” 0304,0600,0202,0000 July 31* Aug. 14 Pl. Dome $19.38 $21.50 Corona A $7.50 $7.63 Hemlo Gold $13.50 $14.25 Teck B $25.88 $27.75 LAC $12.00 $12.63 **gold: US$372.30, index: 6483.61 **gold: $US404.75, index: 6903.47

As for the junior producers and gold explorers, which have not yet reacted to the rising gold price, Cohen sees little gain in the short term. “The juniors aren’t really going to move until the retail investor moves back into the market,” said Cohen. Aside from a few isolated cases, this has not yet happened.

Although he warns that the volatility will likely continue, Cohen, as well as several other gold analysts, remain generally bullish on gold as long as the turmoil in the Middle East continues. “Resistance levels go out the window when, for instance, a war begins,” said Egizio Bianchini, a gold analyst for Nesbitt Thomson Deacon. “They are no match for fear.”