Gold, oil rally on war concerns

Thursday, Dec. 19, 2002 | 11:07 a.m.

SUN STAFF AND WIRE REPORTS

Gold, traditionally a safe haven for investors in times of war, rose for a seventh straight session today and crude oil extended its month-long rally on concern that a U.S.-led war with Iraq would disrupt supplies and hurt the economy.

Gold has been at or near a 5 1/2-year high this week on speculation that President George W. Bush is moving closer to an attack on Iraq, which supplies 3 percent of the world's oil. Some investors are buying gold on expectations that a 56 percent rally in oil prices will spur inflation and reduce the value of other assets, such as stocks.

"There is a bit of fear of war in the gold market, and gold is the No. 1 insurance policy," said Jean-Marie Eveillard, fund manager for the New York-based First Eagle SoGen Gold Fund, with $125 million under management. "We're getting $1 million a day of new money this week, and that compares with less than $100,000 a day a few months ago."

Gold for February delivery rose $3.90, or 1.1 percent, to $346.60 an ounce at 11:21 a.m. on the Comex division of the New York Mercantile Exchange, after earlier jumping $13 to $355.70.

The spot price of gold rose $4.70 Wednesday to $342.10.

The price of the precious metal has jumped 24 percent this year, and some gold bugs are optimistic the rally will continue. Peter Palmedo, a fund manager at Sun Valley Gold LLC in Sun Valley, Idaho, said gold could reach $500 next year, even without a war in Iraq, because investors have been putting money in the precious metal as an alternative to stocks.

Crude oil for January delivery rose 58 cents, or 1.9 percent, to $31.02 a barrel on the New York Mercantile Exchange. Prices have risen almost 18 percent in the past month, spurred by a strike that has disrupted exports from Venezuela, the fourth-largest supplier of oil to the U.S.

Gold-mining shares also rose. The Philadelphia Gold & Silver Index of 11 mining companies gained 0.5, or 0.7 percent, to 77.6.

To be sure, some aren't convinced the rally in gold will last.

"Take away Iraq and gold prices would probably fall," said Steven Wieting, a senior economist at Salomon Smith Barney Inc. in New York.

Gold traded above $400 an ounce before the U.S.-led Gulf War against Iraq in 1991, which came in response to Iraq's 1990 invasion of neighboring Kuwait. That prompted the UN to impose trade sanctions on Iraq, which can only be lifted once the Security Council verifies Iraq has no weapons of mass destruction or the means to make them.

Oil prices surged to more than $39 a barrel in London after Iraq invaded Kuwait, OPEC's sixth-largest member. This time, strikes in Venezuela, the oil group's third-biggest exporter, are boosting prices further by paralyzing shipments.

Demonstrations into their third week are demanding President Hugo Chavez resign and the government call early elections. Chavez has called in the army to break up the protests and requisitioned private vehicles to distribute food and fuel.

Both gold and oil also gained as the euro and the yen strengthened against the dollar, lowering prices for European and Japanese buyers. Both commodities are sold in dollars.

"The weakness of the dollar has had quite a big impact," said Kevin Norrish, an analyst at Barclays Capital in London. "It's been helping to drive things over the last couple of weeks."

Rising prices are boosting Nevada's big gold mining industry, which the Nevada Mining Association says is responsible for 47,500 jobs in the state. Nevada is the world's third-largest gold producer behind Australia and South Africa and is also the nation's No. 1 producer of silver.

As gold prices rise, mining companies have begun searching for gold again after several years of little exploration.

"I would like to see gold prices extremely high. The higher the better," said Russell Fields, president of the Nevada Mining Association. "Realistically, many of our mines were built and financed in the late '80s and early '90s and they were built and financed at then-current gold prices of about $388 an ounce. If we were to return to the days of $400 an ounce, mining would be extremely healthy in Nevada. It's healthy now at (current prices)."