Gold goes over US$400 as Gulf war breaks out

Analysts who had predicted that the price of gold would stage a sharp rally after the Jan. 15 United Nations deadline for Iraq to withdraw from Kuwait proved to be right on the money. As stock markets braced for possible brief closures in the event of a Gulf war, gold bullion surged ahead $13 to US$403 an oz. in London immediately following the U.N. ultimatum for Iraq to pull out of Kuwait. Meanwhile, silver rose to US$4.22 an oz. up from US$4.09 a week earlier.

Ignoring the deadline altogether, a defiant Iraqi President Saddam Hussein visited his troops in Kuwait and warned western leaders that “there would be no compromise” on Iraq’s position.

As the prospect of war loomed, the sharp increase in precious metal prices appeared to confirm that gold is still regarded by many investors as a safe haven in troubled times, despite almost two years of depressed prices. Last year gold dropped as low as US$345 per oz.

During a price rally last August, gold briefly spiked above $400 per oz. in the early stages of the Gulf crisis. Investors then feared that Iraq’s invasion of Kuwait would draw the U.S. into a Mideast war.

But since the Iraqi invasion, forward selling by major gold producers and a deepening economic recession depressed gold below US$400 an oz. in the last few months of 1990. Producers became active forward sellers at US$400 but were absent at US$360, helping keep gold in a narrow trading range which technical analysts describe as a pennant.

“When gold breaks out of a pennant like this one, it normally does so violently,” said analysts at Barclays de Zoete Wedd. That’s because one of the factors which has stopped gold’s “natural trend,” such as producer forward selling, disappears thereby allowing it to catch up with its natural trend quickly.