Reuters, 01.06.03, 8:56 AM ET By Nigel Stephenson

LONDON, Jan 6 (Reuters) - Gold hit its highest level for almost six years on Monday, oil hovered near two-year peaks and the dollar slipped as the United States and Britain were reported readying troops for possible action in Iraq.

Stocks dipped in Europe in the first full trading week of the year after a profit warning from Dutch airline KLM <KLM.AS> and British insurer Britannic showed the earnings picture was cloudy at best, although Asian shares rallied.

Gold <XAU=>, seen as a safe haven in turbulent times, hit a high of $356.25 an ounce, pushing past the previous high of $353.75 touched last month, its highest since March 1997. It later pulled back to $354.65.

"Gold should remain firm for some time to come with the threat of war between the U.S. and Iraq and/or North Korea," said James Moore, metals analyst at TheBullionDesk.com.

The metal's price has soared in the past month as tension has mounted over possible war in Iraq, North Korea's nuclear brinkmanship and as the U.S. dollar has fallen. Bullion is 28 percent higher than this time last year.

The U.S. military has put at least 275 Army Reserve units, involving more than 10,000 soldiers, on alert to be ready to move overseas as soon as this week, the USA Today newspaper reported on Monday. Britain will begin deploying troops to the Gulf on January 15, the London Sunday Times reported.

Oil, which has surged in recent weeks on fears war in the Middle East could disrupt supplies and as a strike in Venezuela has strangled exports from that country, stayed within a dollar of two-year highs.

However, it pulled back from peaks after the OPEC cartel said it would hike output to cover lost supplies from Venezuela.

Brent crude for February delivery was last at $30.55 a barrel, down 22 cents after some profit-taking. It hit a 15-month high of $31.02 a week ago. U.S. crude was at $32.65 a barrel, down 43 cents and off a two-year high of $33.65 hit on December 30.

"Prices are off a little after a big rise during Christmas and the New Year," said Richard Savage of Bank of America. "With uncertainty over the Venezuelan strike and OPEC's response, I would expect volatile trade over the next few days."

DOLLAR SLIPS AGAIN The dollar, seen at risk from the economic fallout of any war with Iraq, fell again on Monday, hovering above recent lows. It was last at $1.0480 per euro <EUR=>, nearly half a cent above last week's three-year low beyond $1.05.

Against the safe-haven Swiss franc <CHF=> it was half a percent down at 1.3891 francs, above the four-year low of 1.3805 set last week.

"Dollar weakness is feeding off the Gulf situation," said Neal Kimberley, senior foreign exchange manager at Bank of Tokyo Mitsubishi. "The market is in weak dollar mode and wants to see how far it can go."

The greenback was half a percent down on Friday's levels at 118.65 yen <JPY=>, about a yen above a 3-1/2 month low set last week. Wariness about potential Japanese intervention to sell the yen increased after Finance Minister Masajuro Shiokawa said there was a global perception the currency was too strong.

European stocks were lower after a surge in Tokyo shares.

At 1345 GMT the FTSE Eurotop 300 index <.FTEU3> was down 0.78 percent while the narrower DJ Euro STOXX 50 index <.STOXX50E> was down 0.3 percent.

KLM shares fell after the airline said it was unlikely to achieve a full-year operating profit as worsening economic conditions and geopolitical instability hit traffic.

Shares in Britannic Group <BRT.L> lost half their value after the company issued a profit warning and scrapped its final dividend. "There will be more profit warnings as the difficult business environment unearths companies with flawed strategies and management," said John Hatherly, head of global analysis at M&G Asset Management.

Tokyo's Nikkei index <.N225> closed 1.57 percent higher as exporters such as Canon <7751.T> led to a broad-based advance. U.S. stock index futures were down slightly, indicating Wall Street was likely to open lower.

Safe-haven euro zone government bonds traded mixed. The yield on the two-year German Schatz <EU2YT=RR>, which moves in the opposite direction to the price, was down 3.8 basis points at 2.73 percent but off last week's 3-1/2 year low of 2.674 percent.

The 10-year German Bund <EU10YT=RR> was yielding 4.31 percent, down one basis point.

Loss in output could cause prices to soar By H. Josef Hebert The Associated Press January 6th, 2003

WASHINGTON -- If the United States invades Iraq, there could be oil shortages and gas lines -- or an oil glut and falling prices.

Much depends on whether American troops can secure Iraqi oil fields and whether other producers continue the flow of oil uninterrupted.

In the growing drumbeat over war with Iraq, the Bush administration rarely mentions oil, even though Iraq has one-tenth of the world’s oil reserves. But a military campaign almost certainly will have a major impact on world markets.

In the event of a war, Secretary of State Colin Powell said recently, "We would want to protect those fields and make sure that they’re ... not destroyed or damaged by a failing regime on the way out the door."

The growing prospect of war, combined with the monthlong political strife in Venezuela that is hamstringing that country’s oil production, already has caused unease among energy traders. Last week, prices for crude to be delivered in February jumped to more than $33 a barrel, 65 percent higher than a year ago. The average price of gasoline has risen steadily to more than $1.40 a gallon. On Dec. 26, pump prices in several cities jumped by as much as 20 cents a gallon overnight.

World oil stocks have been tight and fell sharply last week, the Energy Department says.

"The loss of Venezuelan oil is beginning to hurt," says Robert Ebel of the Center for Strategic and International Studies. "What people are beginning to worry about is, suppose the loss of Venezuelan oil continues when we intervene in Iraq?"

Together, Iraq and Venezuela produce about 5 million barrels a day. Ebel and other energy experts wonder whether increased production from other countries will be able to make up such a shortfall.

With global production at about 76 million barrels daily, a loss of several million barrels could cause prices to soar, economists say. U.S. officials emphasize that oil markets have changed dramatically since the 1970s, when Mideast supply disruptions led to fuel rationing, high prices and long lines at gas pumps.

Nearly 4 billion barrels of oil are in emergency stocks worldwide, including nearly 600 million barrels in a U.S. reserve. If withdrawn at 2 million barrels a day, the U.S. stocks could counter a disruption of 286 days, the administration told Congress this past summer.

"It’s premature to say we’re heading for any price spiral up or down," says Yasser Elguindi, an analyst with Medley Global Advisors in New York. "We have to see what kind of conflict emerges."

Among the scenarios outlined by economists: -- President Saddam Hussein’s government falls quickly, the Iraqi oil fields remain intact and the country’s already dwindling oil exports -- about 2 million barrels a day -- disappear for a few months. Venezuela’s exports resume and other countries, led by Saudi Arabia, boost production to make up any losses.

Prices briefly spike, as they did in the onset of the Gulf war in 1991, to more than $40 a barrel, but within three months recede to normal levels or even lower with supplies plentiful.

-- An invasion meets stiff resistance, Iraqi oil fields are set aflame, production is disrupted elsewhere in the Persian Gulf, global supplies fall by 6 million barrels a day. Emergency stocks cannot close the gap.

In such a case, oil prices could climb to $80 a barrel and stay above $40 well into 2004, halting the U.S. economic recovery and triggering a global recession, according to Ebel, whose group has mapped out a range of scenarios. There is gas rationing and lines at service stations.

George Perry, a Brookings Institution economist, analyzed a similar "worse case" possibility and forecast a potential loss of 7 million barrels a day, a tripling of crude prices and $3 per gallon gasoline.

From all indications, the administration believes Saddam can be toppled without severe impact to oil flow, and some officials have even suggested clear, long-term economic benefit.

With Saddam gone, "you could add 3 million to 5 million barrels of production to world supplies," Larry Lindsey, then Bush’s top economic adviser, said in September, suggesting a successful war "would be good for the economy."

The White House retreated from the comment and Lindsey was later replaced.

Economists agree that a revitalization of Iraq’s decimated oil industry in a post-Saddam, more pro-Western atmosphere, could have lasting impact on global markets.

"A quick victory in Iraq followed by relative stability in the region could lead to increases in oil production capacity in Iraq, Iran and other countries, putting downward pressure on oil prices," Yale economist William Nordhaus recently wrote.

Iraqi oil experts maintain production could reach 3 million barrels a day within a year and double that in a decade -- claims viewed by many as overly optimistic.

"When people talk about Iraq, there are so many unknowns," says John Felmy, chief economist of the American Petroleum Institute. "We haven’t been in the country for years."

It is estimated that it would take billions of dollars to get Iraq’s oil industry into shape where production could be expanded significantly.

By Roger Burbach* 13 December 2002

Luis Inacio Lula da Silva, the incoming president of Brazil, is demonstrating an uncanny ability to move forward a progressive agenda while keeping his conservative antagonists at bay. This was clearly demonstrated in his meeting with George W. Bush in Washington on 10 December 2002. Pablo Gentili, an Argentine international analyst at the State University of Rio de Janeiro, declares: "Da Silva reaped the support of the Bush administration while making it clear that his government will set its own agenda and priorities. He has an extraordinary capacity to build broad support for his left-leaning policies in the face of domestic and international adversity."

Before da Silva's arrival in Washington key Republican Congressional figures, along with right-wing conservatives identified with the Reagan administration's bellicose policies in Central America, were calling for Bush to take a tough stand against the incoming president who is commonly referred to as "Lula". They decried the new leftist threat in Latin America, asserting that a "Lula, Castro, Chavez axis" was in the making, referring to Presidents Fidel Castro of Cuba and Hugo Chavez of Venezuela.

Lula had also been hit by international speculators prior to his visit to Washington. Fearful that the social policies advocated by the new government will adversely affect Brazil's ability to make payments of its huge international debt totalling 240 billion US dollars, the investment bank of J.P. Morgan on 2 December downgraded its rating of Brazil from "neutral" to "negative". This shift led to a slide in the value of Brazil's currency, the real, and a slump in the country's stock market.

As Francisco Meneses of IBASE, an independent research institute in Rio de Janeiro, notes, "Before coming to Washington, Lula positioned himself so that international institutions and politicians like Bush would find it difficult to go after him." The day after he won the Brazilian election, Lula declared that his number one priority when he takes office on 1 January 2003 was to end hunger among 23 million Brazilians, approximately one-seventh of the country's population. The campaign will be accompanied by increased subsidies to poor families aimed at keeping their children in school, by a fairly radical agrarian reform programme and by significant government support for agricultural cooperatives.

"By making the ending of hunger his number one priority, Lula has inoculated himself against many of his detractors," says Meneses. As an expert on agrarian issues, Meneses has been participating in the planning meetings for the government's campaign against hunger. He says the World Bank, along with the United Nations Food and Agricultural Organization, have already informally committed their institutions to spending 5 billion US dollars over the next four years on the campaign against hunger.

Even the most orthodox international lending institutions have been checkmated by da Silva's announced policies. Just days before Lula left for Washington, the head of the International Monetary Fund, Horst Kohler, went to Brazil. After meeting Lula, Kohler proclaimed that the incoming president "is a leader for the 21st century". He even endorsed Lula's call for increased social spending and lamented J.P. Morgan's downgrading of Brazil's investment rating.

One major area of discussion between the Bush administration and Lula in Washington focused on the Free Trade Area of the Americas (FTAA). Bush has made this agreement the lynchpin of his Latin American policy, calling for all the countries of the hemisphere (except Cuba) to begin reducing trade barriers in 2005. Lula has repeatedly expressed reservations about FTAA, asserting that it favours US domination of Latin America.

Lula positioned himself strategically in the FTAA debate by meeting regional allies before going to Washington. As Marcos Arruda, a foreign policy consultant to the incoming government notes: "Lula intentionally visited neighbouring countries before visiting Bush to make it clear he would not grovel for US support and that Brazil has its own agenda and interests in South America." On 2 December Lula visited Argentina, Brazil's leading partner in MercoSur, the regional trade block that also includes Uruguay and Paraguay. Next he went to Chile, an associate member of MercoSur. In his major address in Buenos Aires Lula called for a strengthening of MercoSur "so we can take control of our destiny" and end "our dependency on international currency flows". In Argentina as well as Chile, Lula asserted that MercoSur should take priority over other trade agreements, and went on to call for a common currency among MercoSur nations and the formation of a regional Parliament.

In Washington Lula was able to seize the commercial high ground by pointing to a series of US protectionist measures that actually run counter to authentic free trade. Approximately 25 per cent of Brazil's exports valued at over 14 billion US dollars currently go to the United States. Twenty of the leading products face average US tariffs of 39 per cent. If the trade barriers were removed on just four products - orange juice, steel, meat and soy products - it is estimated that annual Brazilian exports to the US would jump by 2 billion US dollars.

Francisco Meneses of IBASE believes it is doubtful that the talks between Lula and Bush will actually lead to any significant reduction of US trade barriers, particularly on products like orange juice. "Bush's brother Jeb, as governor of Florida, obviously has a stake in keeping out Brazilian juice because of his alliance with local orange growers." Moreover, Meneses worries that even the apparently favourable rapport between Lula and George W. Bush will soon sour. "With Iraq and the Middle East, the administration has its hands full; it doesn't want to create a crisis with the Lula government for now. Bush is biding his time. He will wait for the inevitably deeper reactions of domestic and international interests opposed to Lula's progressive social policies before moving against the new government."

January 3 2003 By Hector Tobar Brasilia

Amid a swirl of red flags and a chorus of leftist slogans, Luiz Inacio Lula da Silva was inaugurated as President of Brazil on Wednesday. He promised to launch a crusade for social justice, but his aides announced that one of his first acts would be a fiscally conservative move to limit the size of government.

"When I look at my own life, I know with great certainty that we can do much more," said the man most Brazilians call simply Lula, recalling his rise from an impoverished rural family, to factory worker and union leader, and now President of Latin America's largest nation.

"We will bring about change with courage and humility," Mr da Silva said in an inauguration speech before the National Congress that lacked specifics on measures he will take to address the nation's economic crisis and its $A464 billion debt.

That didn't seem to matter at the inauguration: More than a few of his supporters greeted the arrival of Mr da Silva's caravan with the wild enthusiasm of rock fans. One man nearly pulled the new President out of his moving Rolls-Royce in an attempt to embrace him, while others jumped into the pools of water that surround many government buildings, waving their arms frantically.

Yesterday Mr da Silva was scheduled to sign his first decree. It will require all ministers to reduce their staffs by 10 per cent and will prohibit them from issuing new contracts for 30 days.    advertisement       advertisement

Such austerity defined the government of his predecessor, Fernando Henrique Cardoso.

"Change will be slow and gradual," said Luciano Dias, a political scientist. Yet, as was clear again on Wednesday, many of the voters who elected Mr da Silva in a landslide in October expect nothing short of a wide-ranging social revolution. They want quick action on the promises he reiterated in his inauguration speech, including agrarian reform and a "zero hunger" program.

"This is a victory of the people," said Odete Costa, an activist from the President's Workers' Party from the Amazonian state of Para. "We will have a new kind of government, we will do away with corruption, and we will fight hunger."

In all, more than 100,000 people, many of them Workers' Party activists, descended on the capital to celebrate.

Cuban President Fidel Castro was among the visiting dignitaries, as was beleaguered Venezuelan President Hugo Chavez - both fiery leftists.

In his speech, Mr da Silva received the loudest and longest ovation for a jibe at the Bush administration's war plans in Iraq. "International crises, like the one in the Middle East, should be resolved through peaceful means and negotiation," he said.

More than 100 countries sent representatives to the inauguration. The US sent its Trade Representative Robert Zoellick, who met Antonio Palocci, Mr da Silva's Finance Minister, for an hour on Wednesday.

"It was a listen-and-learn visit, in which the basic economic problems of Brazil were discussed," Mr Zoellick said.

While still a presidential candidate, Mr da Silva agreed to abide by an agreement with the International Monetary Fund to maintain a budget surplus of 3.75 per cent during his first year in office.

In the weeks before the inauguration, he filled key economic posts with men considered friendly to Wall Street and the international investment community, including his nominee for president of the Central Bank, Henrique Meirelles, a former executive at Bank Boston.

"One thing that the Workers' Party has learnt in these past eight months is that the markets have power and the party will have to abide by that," said Alexandre Barros of Political Risk Analysis, a Brasilia consulting firm.

• Los Angeles Times

By Brian Ellsworth Special to UPI From the Business & Economics Desk Published 1/2/2003 3:38 PM

CARACAS, Venezuela, Jan. 2 (UPI) -- The Venezuelan government and the political opposition have not been able to agree on almost anything in 2002. However, neither side seems to have any doubt that the opposition strike will have a crippling impact in 2003 on the economy of the world's fifth-largest petroleum producer.

The Venezuelan government is losing an estimated $35 million per day from the decline in petroleum revenue, which accounts for almost half of government finances. While it has been able to continue functioning during the first month of the strike, time may be running out.

The first month of the strike is expected to cause an additional reduction of 1.28 percent in 2002 gross domestic product, which declined by a staggering 6.6 percent in the first semester of the year.

"From a fiscal point of view, the government is against the wall," said Francisco Rodriguez, the head of the government economic analysis office. Rodriguez indicated Thursday that in order to continue meeting obligations, it will have to chose between defaulting on domestic debt or stopping payment of government workers' salaries.

Private sector analysts had a similar perspective.

"The extension of the protest beyond 45 days would make it impossible for the government to pay off its debts," says a report released by the currency exchange house Econoinvest. The report estimates that the government only has enough resources to pay debts until the end of January.

To make up for the losses in December, the government has dipped into its dollar reserves. Central Bank figures show that reserves have declined by $1 billion of a total of $15 billion. As a result, the local currency, the bolivar, has declined sharply against the dollar, slipping from Bs 1,263 on the dollar on December 16 to Bs 1,401 by the end of December.

Legislators are expected to announce changes in the proposed 2003 budget this week.

The strike leaders insist that Chávez must either resign or call early elections, both of which he refuses to do. The opposition hopes to shut down the country's refineries to restrict the supply of gasoline for local consumption. This would eventually restrict transportation prevent effective transport of food, increasing the pressure on Chavez. They also hoped that restricting petroleum exports could starve the government of cash, leaving few alternatives when reserves begin to dwindle. As part of the strike, opposition leaders are encouraging businesses and industries not to pay their taxes to further decrease government funds.

Although it has pinched government finances, the strike has far from paralyzed Venezuela. The shortage of gasoline caused mostly long lines and headaches, but no serious food shortages or public order disturbances. Many small businesses have opened their doors, and the informal economy has kept the streets filled with holiday shoppers.

The strike, combined with the possibility of U.S. military action in Iraq, has pushed the price of petroleum on the international market above $30 per barrel, 57 percent higher than the closing price last year.

The strike represents the culmination of the conflict between Chávez, a populist former left-wing leader who led a failed coup in 1992, and the country's political opposition who say he governs autocratically. A similar petroleum strike last April led to a coup that removed briefly removed Chavez after political violence left 19 people dead. Loyalist troops and supporters restored him to power two days later.

The opposition accuses Chavez of trying to create trying to turn Venezuela into a communist state, and is angered by his populist rhetoric and friendship with Cuban President Fidel Castro. They say the Chavez government has politicized the armed forces, taken over public institutions, and restricted free speech.

Nonetheless, Chavez swept in six consecutive elections starting in 1998. He currently has roughly 35 percent support of the population, which is one of the highest levels of support of any Latin American leader today. He still retains enormous support from Venezuela's poor, which make up 80 percent of the country's population.

The opposition spent most of the year blaming Chavez for the economic recession that began in 2002. Nonetheless, they acknowledge that the strike will cause enormous economic damages in the coming year. The government, for its part, has been put in the awkward position of trying to deny that the strike has affected the country, while simultaneously condemning it as "terrorism."

The opposition and the government maintain a media war over the functioning of the petroleum industry. According to government leaders, the country is producing 800 thousand barrels of crude oil per day, far below the 2.8 million barrels allowed by its quota mandated by the Organization of Petroleum Exporting Countries. However, strike leaders say the nation is only producing 150,000 barrels per day.

Government leaders have given varying estimates of actual production. Last week, PDVSA President Ali Rodriguez announced the country was producing 1.2 million barrels per day, but two days later corrected himself, saying the production was in fact only 800,000.

Sources in the United States indicate that U.S. crude reserves have fallen since the start of the strike. However, some say that both sides are manipulating information.

The government also says that refineries are functioning normally, while the opposition assures that they are almost completely shut down.

The government assures that the petroleum industry will be functioning normally by the end of February. During his a visit to Brazil to celebrate the inauguration of President Inacio Lula da Silva, Chavez asked the Brazilian government to send technicians and equipment to help restart petroleum operations.

The request comes a week after the Venezuelan government purchased 520,000 barrels of refined gasoline from Brazil. It was the first time in Venezuela's history that it had ever imported gasoline. It also purchased gasoline from neighboring Trinidad. However, gasoline purchases have been expensive, since the government buys gasoline on the international spot market at roughly $60 per barrel, and sells it at a subsidized rate of $11 per barrel on the domestic market.