Gold and terrorism

In the wake of the terrorist attack on the U.S. on Sept. 11, at least some investors have looked to gold, the traditional haven in times of crisis.

Gold prices responded swiftly, and the London morning fix on Sept. 14 was the highest since the brief rally in May. But will gold stay at this level, or go higher or lower?

Philip Klapwijk, managing director of London-based Gold Fields Mineral Services, could only speculate:

“It is too early to be sure whether the crisis will result in sharply higher prices or, alternatively, a somewhat weaker situation than was the case prior to the outrage on Sept. 11,” he says. “This uncertainty stems from the fact that different and opposing forces may have been unleashed in the wake of the attack.”

On the one hand, the surge in buying interest, albeit on a relatively small scale, could be built on as the markets resume normal service in the coming weeks. Concerns over risks to the financial system have not dissipated, and may even have been encouraged by, the enormous amount of liquidity pumped into the system, particularly by the U.S. Federal Reserve. The U.S. dollar could well slide further than it has to date. The country has been shown to be vulnerable, and that will wipe some of the lustre off gold’s primary paper rival. The dollar is also unlikely to benefit from falling stock prices, owing to a more pessimistic economic outlook.

Retaliation by the U.S. could spark a more serious conflict in the Middle East. The global political climate is hot, and in times of uncertainty and concern, it’s likely that there could be a move toward tangible assets such as gold. Thus, there is a reasonable chance that a more favourable atmosphere would encourage some move into gold by investors — and not only in the U.S. We are already hearing reports of a buying surge in Thailand, a country as far removed from the crisis as any other.

If investment demand does not materialize or if the move into gold is short-lived, then the attack on the U.S. would likely usher in a difficult period for gold and other commodities. It’s possible that the terrorist onslaught would accelerate the downturn that was already taking place in the U.S.

“Consumer spending, will be negatively affected by the appalling events of September 11,” states Klapwijk. “The rather unexpected buoyancy of consumer spending kept the United States out of recession in the first half. We believe it is most unlikely to perform the same trick in the second half.”

The recession that now looks more probable in the U.S. will be exported to the rest of the world, where economic conditions are worsening. Gold fabrication demand under these circumstances will certainly decline more sharply than expected prior to the terrorist bombing, and this will undoubtedly put downward pressure on the gold price. As posed earlier, the question is: will investment demand under these same circumstances be capable of holding the price or even pushing it sharply higher?

— The preceding is from a bulletin published by the London-based World Gold Council.