Effect of Middle East crisis on metals is hard to predict

If Middle East tensions escalate to the point where gun fire is exchanged, investors who have been selling their gold assets to take advantage of recent price increases could move back into the market, analysts say. The effect on bullion and gold share prices will be to drive them up from this week’s US$408-per-oz. level toward US$450.

But the impact of a long-term crisis in the Middle East on base metals appears to be much more difficult to predict. Since Iraq President Saddam Hussein sent tanks into Kuwait, the price of gold has shot up to a high of US$417.50 from US$371.

While nickel is trading at US$5.16 per lb. on the London Metal Exchange, up from US$4.63 on Aug. 1, movements in the price of lead, copper and zinc have been only marginal.

Base metal analysts expect those prices to remain where they are unless the rising price of oil throws the western world into a major recession and demand for metals drop.

“Unless there is some catastrophic event that we can’t predict, I don’t see why the situation in the Middle East should make us any more bullish or bearish on the outlook for base metals,” said Julian Baldry, mining analyst with Nesbitt Thompson Deacon in Toronto.

Even if there was to be a major war in the Persian Gulf, any price increase resulting from increased demand for base metals may be offset by the resulting global slowdown and declining non- defence needs, Baldry told The Northern Miner.

Also, recent advances in technology and the widespread use of fibre optics mean that copper, for example, which was once a vital component in the construction of battle ships, can no longer be regarded as the war metal.

As for nickel, the balance of supply and demand within Russian and other Eastern block countries far outweighs anything that happens in the Middle East, said Martin Webster, director of market planning at Toronto-based Falconbridge Ltd.

“It is our feeling that higher oil prices will have a greater impact on the profits of base metal producers like Inco (TSE) and Alcan (TSE) than on metal prices,” added Baldry. However, rising oil prices may raise some people’s costs and not others, depending on how their operations are fuelled, he said.

Meanwhile, the recent sale of US$1-billion worth of gold by the Soviet Union combined with forward selling should keep the yellow metal in a holding pattern unless the Persian Gulf impasse is broken.”We need a skirmish to take gold out of its holding pattern,” said Michael Jalonen, an analyst with Midland Walwyn Capital Inc. in Toronto.