Geopolitical Risk in Middle East Could Affect Gold Prices

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Gold

Gold closed at $895.50 in New York Friday and was up $23.30; silver closed at $17.37 and was up 30 cents. In the New York Globex market gold subsequently rallied to $902.20 late Friday. Both traded sideways in Asia this morning prior to rallying higher in early European trading.

The gas explosion in Western Australia will further curtail supply of gold from that part of the world. It has led to the loss of some 30% of the state’s gas supplies and is already creating serious problems for Western Australia’s massive gold mining industry and will curtail supply for months, rather than weeks.

Similar supply issues remain prevalent in South Africa due to their significant power supply difficulties which will also be supportive of prices.

Geopolitical Risk in Middle East Remains Ever Present but Largely Unacknowledged

A reminder if one were needed that geopolitical risk remains ever present was given on Friday when the Israeli Transport Minister, Shaul Mofaz, threatened to bomb Iran saying that bombing Iran’s possible nuclear sites was “unavoidable”. Mofaz is the former army chief, has also been defence minister and is one of Prime Minister Olmert’s most trusted ministers – thus his comments were taken seriously in the markets and saw oil surge $US11 in a matter of hours and gold rally sharply simultaneously.

House Judiciary Chairman John Conyers, in a letter to President Bush on May 8, threatened to open impeachment proceedings if Bush ordered a U.S. attack on Iran. The letter is seen by some that planning for strikes on Iran is under way and pronounced.

Any attack on Iran would likely see Iran retaliate by withholding crude exports and targeting key oil transport routes in the strategically vital Straits of Hormuz – where some 30 percent of global crude supplies pass through. There is also the possibility of a wider conflict developing in the region with Lebanon and Syria getting involved.

Should this happen, oil would likely surge to well over $200 a barrel in a short period of time and it would lead to a significant increase in safe haven demand for gold and consequently sharply higher gold prices.

Consumer Confidence Plummets as UK Inflation Surges to Record – Stagflation Threatens

Consumer confidence in the UK has hit a record low after big rises in the cost of living and falls in property values, figures have shown this morning. But hopes of a cut in interest rates to boost spending have been hit by the news that factory gate prices surged at their fastest rate for 27 years during May. According to a survey by the British Retail Consortium a third of Britons have major concerns about the economy. The Nielsen/BRC UK Consumer Confidence index now stands at 79 compared with 91 at the same time last year. That is the lowest score since the survey began in 2003.

Soaring petrol, scrap metal and food costs caused them to rise by 1.6%. That is the biggest increase since March 1981, according to the Office for National Statistics (ONS). Leading economist Howard Archer described the data as “absolutely appalling”. British factory gate inflation hit a record level in May as firms’ raw material costs surged at their fastest rate in at least 22 years. The Office for National Statistics said output prices rose 1.6% in May alone, taking the annual rate to a record 8.9%. Core output prices, which exclude food, drink, alcohol and tobacco, also surged by 1.2% on the month, three times the monthly rate predicted by analysts.

Gasoline prices are surging in the UK and internationally. In the U.S., gasoline prices reached a national average of $4 a gallon for the first time over the weekend, adding more strain to motorists and the embattled U.S. consumer. Gas prices have doubled in recent months.

With house prices continuing to fall sharply and the property market now in effect crashing, stagflation is now clearly the biggest threat to the UK economy (and internationally) and all investment portfolios.

Today’s Data and Influences

The U.S. housing market is back under the spotlight today with the release of pending home sales data which are again expected to be weak.

A speech by Bernanke this evening will be closely monitored after his comments last week about inflationary pressures and the impact on these of a weak dollar. In the eurozone, there are no releases of note but Trichet and Quaden of the ECB will also speak. Markets will be listening to see the extent their comments mirror the hawkish tone of Trichet’s ECB press conference last Thursday.

Silver

Silver is trading at $17.50/17.56 per ounce (1200 GMT).

PGMs

Platinum is trading at $2062/2072 per ounce (1200 GMT).
Palladium is trading at $432/437 per ounce (1200 GMT).

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