gold carry trade exposed... and caught short??, page-2

TOKYO, Dec 19 (Reuters) - Tokyo gold futures ended a frantic

morning session at 5-1/2-year highs on Thursday as roiling war

clouds over Iraq triggered a storm of stop-loss buying.

All yen-based gold contracts <0#JAU:> except the new December

2003 benchmark finished limit-up at lifetime highs. Turnover was

a staggering 144,782 lots or 144.8 tonnes in the morning, well

over Wednesday's full-day tally of 107,336 lots.

Individual investors on the Tokyo Commodity Exchange took

their cue from spot bullion's surge to a new 5-1/2-year high as

jittery Australian investors piled money into safe-haven assets.

But dealers said Tokyo's fireworks were mainly ignited by

trading houses after an early burst of speculative buying on

TOCOM, with panic setting in as spot gold's rise above $347 an

ounce released a volly of stop-loss orders.

"Iraq is just an excuse," a trader with a big Japanese

trading house said. "I believe none of the traders would say they

didn't expect this. Everybody has been talking about military

action in Iraq for three or four months."

News that the United States was likely to declare Iraq in

violation of a U.N. disarmament resolution sent oil prices

soaring and added sparkle to gold's traditional image as

insurance against trouble.

The United States said on Wednesday it saw no sign Iraq would

comply with demands to disarm, while Washington's closest ally

Britain gave a clear signal it was preparing for war against

Baghdad next year.

Making its debut, the December contract finished the

morning session at 1,360 yen per gram, a level not seen for

benchmark gold since May 9, 1997. Other months ended up by the

daily price limit of 40 yen.

Spot gold was fetching $348.50/349.50 an ounce during

TOCOM's lunch break, up from $342.00/75 last quoted in New York.

Spurred by U.S. sabre-rattling against Iraq, a weak dollar

and strong oil prices, gold has risen nearly 25 percent this

year, making it one of the best-performing financial assets.

A weak greenback makes dollar-based bullion cheaper for

non-U.S. buyers. For Japanese investors, however, it makes

yen-based gold futures more expensive -- a consideration that

traders and analysts said was capping the Tokyo market.

"Still people are worried about a stronger yen," the trader

said. "If the United States starts attacking Iraq, the dollar

would collapse. So in yen terms, the price surge is rather

vulnerable."

The dollar weakened slightly in morning Asian trade, hit by

the bankruptcy of major U.S. financial service firm Conseco Inc

and U.S.-Iraq tensions.

It was fetching 121.06/11 yen at 0303 GMT, having

fallen as low as 120.69.

Gold dragged other precious metals futures higher in Tokyo.

Platinum contracts <0#JPL:> gained between 24 and 36 yen,

with the new December 2003 platinum contract ending at

2,226 yen per gram.

Sister metal palladium <0#JPA:> rose 19 to 32 yen, while

silver <0#JSV:> tacked on 2.4 to 3.5 yen.

((Reporting by Tim Large, editing by Dale Hudson;

Reuters Messaging: [email protected];

+81-3-3432-7431; [email protected]))