Let's Play the Iraq Game As much as I hate to prune away the complexity of markets by focusing on one feature that seems to be driving them, its difficult to resist the exercise. Let's face it, markets very rarely make sense. Even though Iraq is thousands of miles away and will only have the barest of influences on the American economy, the war's psychological impact has been massive. It seems that market participants have been fooled into simplistic notions equating war with economic recovery, and economic recovery with rising stock market. Just overlay the Dow over a timeline of the invasion - ever since it began the Dow and its cousin the Nasdaq have been on a tear. Which brings us to Uday and Qusay. Their deaths caused the Dow to tack on over 100 points last Tuesday, see the chart below. Millions of dollars in market capitalization added, just because two poor souls died? Unusual, but it happened. That Tuesday, the world seemed to breath a collective sigh of relief. Gold, traditionally a safe haven that does good in bad times (and vice versa), fell almost $3 on the news. All evidence points to the following relationship; good news for the American cause in Iraq creating a strong Dow while driving gold down.
Of course, this leads us into the Big Question: what happens when the U.S catches Saddam? Thus begins our effort in foreward thinking and planning. First - you do not want to be short when this is announced. If Uday and Qusay's demise influenced people to push markets up 100, then Saddam's will influence mob optimism to even greater extents. And you can be sure that gold will catch some of the flack.
What to do? Quick traders may want to take a short Dow position sometime after the announcement's bullish effects have rumbled through the market, especially if they've captured Saddam rather than killed him. If the Americans have only caught him, they will find they have pulled a bomb out of their hat, not a rabbit. Do we try him in the U.S? In Iraq? In Switzerland? Do we allow him to have his say and denounce us, possibly becoming a martyr? Do we execute him? Do we imprison him? After the initial euphoria of Saddam's capture, you can be sure that this second perception, one antagonistic to the American/bullish cause, will drive markets, providing shorts with the sort of psychology that will lead to a decent profit.
Even easier than shorting equities - buy gold. Wait for a fall of $4 upon the dictator's death, perhaps buying cheap an hour or two after the announcement. You can be sure that Saddam's death will hurt gold in the short term, but only dent its upwards potential - after all, it will only be a small event in a sea of causes and effects that is currently circulating in the metal's favour.
© JPK and Lope
2002