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G. Chandrashekhar

MUMBAI, March 27

WHAT are the implications of the ongoing war against Iraq for the gold market?

The onset of military activity has sparked a number of questions about the behaviour of the yellow metal. How would gold react during the period of war that is widely expected to be short-lived and after the war has ended?

Even as the war is currently in progress, there is a continuing relief rally in equity markets and the dollar. This is expected to encourage downside pressure on gold. Indeed, prices have already fallen to around $330/oz

The next key support level is towards $315/oz, according to Mr Kamal Naqvi, analyst with Macquarie Research Equities.

However, the expert asserts, the sustainability of equity market and dollar gains will be determined by post-war economic reality with the clear hope being that improved sentiment will feed on itself and thus sustain further gains.

However, it is widely believed that even a short, fully successful war is not a panacea to the economic financial and geo-political issues currently facing the world. It might, therefore, be reasonable to expect good support for gold at lower levels and a bounce back in gold prices following the end of the current war-driven equities and dollar rally.

After the 1991 Gulf War, gold prices continued to soften and by the end of 1991, were trading at around $350/oz, about the level it was before the Iraqi invasion. The dollar was weakening before the Iraqi invasion of Kuwait and then depreciated further. However, it enjoyed a very strong rally on news of the ceasefire before weakening again during the second half of 1991 as the US moved into recession, the analyst pointed out.

"For 2003, we believe that strong economic growth is difficult to see regardless of war, while the trend in inflation is less clear; but we suspect it will remain very low for much of 2003 and into 2004,'' Mr Naqvi remarked, adding "the combination supports our view of gold holding above $330/oz for much of 2003, despite some short-term weakness''.

Economists across the world are not optimistic about a significant recovery any time soon from the current global economic slowdown. Indeed, after Gulf War 1991, the US had a dream run of economic growth for many years in succession, the effect of which was felt around the world. It is of course another question whether war triggered growth.

But this time, post-Gulf War II, the prospect of a quick economic recovery is not regarded as really bright. The global economy is more fragile now than a decade ago. Dotcom bust and accounting scandals have shaken investor confidence in the equity market. Japan is just a shadow of its former self, while Europe continues to fight its own problems including high labour cost.

Continuing economic slowdown and limited recovery prospect will lend support to the gold market.

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