Gold a safe haven once again, or so it seems Where the trouble ain’t

With gold touching US$350 per oz. on Boxing Day, we seem to be seeing the revival of the old relationship between the gold price and international tension. The old “safe haven” explanations for the metal’s market behaviour are looking respectable again, and the psychology of the market appears to be responding to international events for the first time in a long time.

Before the gold bugs start their told-you-so chorus, it should be noted that investors are back in gold, and they watch the news. Gold market watchers that hung in there through the long, dark ’90s have been less surprised by this line of events, and it’s the sober view — that gold would move up once financial assets had made themselves look bad — that has been vindicated by the present market.

But gold’s place as a barometer of tension and uncertainty underscores what we’re now seeing in much of the world. The Middle East and its terror exports are only the most obvious subjects in this picture — there are others, and they are all, in their own ways, ominous.

North Korea announced it had joined the nuclear club in October, admitting it had breached an agreement with the United States under which the Americans had supplied crude oil and nuclear-reactor technology in exchange for a promise that the North Korean government would cease its attempt to build nuclear weapons. Far from seeing the government’s unusual set of priorities — nukes over food — as an implicit threat, the U.S. government had marked it as an opportunity to “engage” the North. The authors of that arrangement have contrived not to see how foolish that was.

Our own government, over loud objections, extended diplomatic relations to North Korea in early 2001, in a triumph of former External Affairs Minister Lloyd Axworthy’s characteristic wishful thinking. If, as Winston Churchill said, the object of diplomatic relations is not to confer a compliment but to secure a convenience, Canada secured the convenience of just over $160,000 in trade and the opportunity to worry about Canadians travelling in North Korea from a vantage point in Beijing.

Now those policies have been shown up for the nonsense they were: the North Korean government of Kim Jong-il is playing at nuclear brinkmanship, a game it is not nearly so experienced in as were the Americans and Russians of the Cold War period. If Kim (called “a smiling unfathomable dumpling” by one knowledgeable commentator) miscalculates, much damage could be done. Triumphalism about the gold price may not provide much solace in that event.

Crude oil has broken the US$30-a-barrel mark, not so much in response to the fear of war on Iraq but as a direct consequence of bidding wars in the crude market, thanks to the general strike in Venezuela. The United States, which buys about half of Venezuela’s production, has made up the shortfall by importing from other oil producers, so there is no actual shortage yet on the spot market. But stay tuned: a real shortage could have serious effects on the global economy, and the financial markets could be dealt another serious blow.

That might be one of the factors that have kept the financial markets unsettled in recent weeks. Off an October rally, the markets have moved essentially sideways for the past two months. The Big Three reserve currencies appear to be vying with one another to see who can be the weakest.

Into that scene walks gold, looking better than it has in years. But the resurgent price does not necessarily spread its favours evenly. What profits an investor, that he punt on a gold project in a nasty part of the world, and lose his shirt?

The obviously stable gold producers — Canada, Australia, the United States — will get the greatest benefit if international tensions propel the gold price higher. Some other producers, like the secure democracies in Latin America and some of the stable countries in West Africa, also will rate highly. European gold producers will earn a look, as well.

But the more exotic destinations we all had hopes for back in the mid-’90s are on the front line now. An investor forewarned is forearmed.