Gold price well supported by Middle Eastern tension

2012-JAN-09

The gold price has enjoyed a good start to the year – rising 3.2% over the course of last week. Silver has had a slightly slower start to 2012; the sooner the white metal reclaims the psychologically important $30 mark the better as far as bulls are concerned.

While silver continues to suffer at the hands of market uncertainty and the prevailing “risk-off” attitude among hedge funds, gold is being boosted by this flight from risk – linked in part to the growing tensions in the Middle East; specifically, the growing threat of war between the US and Iran. The Iranians have been threatening to close the Strait of Hormuz – through which 20% of the world’s traded crude oil is shipped – in response to new sanctions on its oil exports.

Yesterday, US Defense Secretary Leon Panetta insisted that any moves by the Iranians to restrict oil flows through the Strait were a “red line” issue for the US government, which would be met by a military response. Both the Iranians and the US and Israel are planning military exercises in the Persian Gulf in the coming weeks, while Tehran will also conduct military exercises along its border with Afghanistan. Ironically, a crew of Iranian fishermen were saved from Somali pirates by forces assigned to the US aircraft carrier John C Stennis on Friday. Brent crude oil is still above $112 a barrel, while WTI crude (the North American benchmark) is above $101.

On top of this, the Iranians and the Russians have announced plans to replace the US dollar with their own currencies in trade between their two nations, a move announced on the side-lines of meetings of the Shanghai Cooperation Organisation (a body that we will likely be hearing much more about in the coming years). This follows a similar move from China and Japan in late December. The Iranian government remains a keen buyer of gold, as do the Russians.

All of this emphasises the fact that the dollar’s days as the world’s reserve currency are drawing to a close. Another symptom of this decline is the increasing reluctance of foreigners to invest in US Treasuries. Though it’s still too early to make bold pronouncements about the significance of these recent sales of US debt, this data certainly bears close attention over the coming weeks.