Gold bulls ravaged by angry bears

2011-DEC-29

Gold and silver bulls endured another tough day yesterday, as silver sunk below the $28 mark, while the gold price fell towards the mid $1,500s. The lack of liquidity in the futures market at the moment has accentuated the selling pressure in these markets, with euro-weakness and US dollar-strength also hurting precious metal prices.

Comex gold for December delivery fell $31.30 (2%) to settle at $1,562.90 per troy ounce. Silver for delivery in the same month lost $1.505 (5.2%), settling at $27.192 per troy ounce. Commodities in general came under strong selling pressure, though crude oil continues to receive strong bids owing to concerns about the possibility that Iran may close the Strait of Hormuz in retaliation for a western embargo on Iranian oil exports. At its narrowest point, the strait is just 34 miles (54 km) wide (a stretch of water separating Iran from Oman).

The strait is the only sea passage to the open ocean from the Persian Gulf, and is one of the most important geostrategic choke points in the world. 33% of all seaborne oil shipments pass through the strait – and 17% of all world oil shipments. Tuesday saw the Iranians threaten to cut off oil shipments through the strait in retaliation for any moves to embargo the country’s oil exports. Such a move could result in a significant short-term oil price spike, though given the formidable US military resources in the Middle East – all within easy striking distance of any Iranian forces that sought to disrupt oil shipments – it’s hard to believe that the flow of oil would be stopped for long. But a longer war with Iran would certainly result in a longer period of higher oil prices. Iran is the third-largest oil-exporting country in the world. The gold price will also move higher in the event of war.

Brent crude settled yesterday at $107.56 a barrel, down by $1.71 (1.6%). WTI crude lost $1.98 (2%), settling at $99.36 a barrel. It’s interesting to note that in 2008 – the year when oil hit a record high at close to $150 a barrel – the average price for WTI over the course of the year was $99.67. In 2011, and despite the economic contraction that’s hit Europe and America since 2008, the average price of WTI still stands at $94.81.

Though the Italian government successfully auctioned off short-term debt yesterday, sentiment remains bearish on the euro. The EURUSD currently stands at $1.2903, while the Dollar Index is above 80.5.

For interesting analysis of the Fed’s recent dollar-euro swaps with the European Central Bank, readers should have a look at an article in The Wall Street Journal from Gerald O’Driscoll Jr. Mr O’Driscoll served as vice-president at the Federal Reserve Bank of Dallas and later at Citigroup. As he points out, these swaps are a disguised way of bailing out Europe. In his words: “No matter the legalistic interpretation, the Fed is, working through the ECB, bailing out European banks and, indirectly, spendthrift European governments.” Go and read the whole article.