Threat of war may spark surge in gold

By Claudia Carpenter
Bloomberg News Service

NEW YORK — Gold, on track for its biggest annual gain in 23 years, may rise further in the new year as the threat of a U.S.-led attack against Iraq prompts buying of the metal as a haven, analysts and traders said.

Gold futures soared 24 percent last year, reaching a 5 1/2-year high close to $350 an ounce, as tumbling stocks and a weakening dollar sent investors looking for alternative assets.

Prices may rise as much as another $50, even before any attack, some traders said.

"We might go to $380 or $400, but it's going to have a hard time getting over that," said Leonard Kaplan, president of Prospector Asset Management, a money-management company in Evanston, Ill.

This year's gain for gold is the largest since prices more than doubled in 1979 as investors sought refuge from rampant inflation, which reduced the value of competing fixed-income assets such as bonds.

An attack against Iraq might spark a surge in gold prices, said Bill Giannone, senior gold trader at Hudson River Futures in New York. Gold would "move up very sharply, very quickly and then pull back," he said.

Gold soared 12 percent in the three weeks following Iraq's invasion of Kuwait on Aug. 2, 1990, and gave up all the gain by mid-October. Gold prices fell 7.4 percent on Jan. 17, 1991, the day after the beginning of Desert Storm, the allied response to the incursion, on prospects for a quick end to the military action.

"If what occurs is similar to back then, there will be a fairly rapid selloff in gold shortly after the action starts, and that coupled with the ensuing positive impact on the economy, will put gold under pressure through the summer," said Frank McGhee, head gold trader at Alliance Financial LLC, a Chicago-based gold- trading company.