Oil and Gold Surge 1% on Open in Asia - Iran "Military Action Likely"

Published in Market Update  Precious Metals Update  on 20 February 2012

By Mark O’Byrne

Gold’s London AM fix this morning was USD 1,729.50, EUR 1,307.36, and GBP 1,090.82 per ounce.

Friday's AM fix was USD 1,732, EUR 1,316.51, and GBP 1,093.09 per ounce.

Cross Currency Table - (Bloomberg)

Gold, in conjunction with oil, rose nearly 1% at the open in Asia prior to gradually giving up those gains as the Asian trading day progressed and as Europe opened.

Gold’s gains were due to tension regarding Iran and higher oil prices - oil surged 1.2% at the open to $105.21 per barrel (NYMEX WTI).

Support also came from further policy easing in China and concerns about the Greece debt crisis and the continuing risk of Euro zone contagion ahead of another meeting of euro zone officials later today.

Gold Spot $/oz Daily – (Bloomberg)

The appalling fiscal state of Japan may also be leading to demand – especially in Asia.

S&P warned today it could lower Japan's sovereign rating if the economy expands more slowly than expected or if public debt continues to grow –both of which seem likely. 

The agency reaffirmed its AA- rating on Japan with a negative outlook, but warned that the higher taxes the country's unpopular government is seeking to impose will not resolve the structural problems that are pushing up welfare spending and putting increasing pressure on state coffers.

Contrary to reports that gold traded ‘flat’ last week, gold in fact rose 0.15%. While a marginal rise it was important from a technical point of view, somewhat negating the two  consecutive weekly falls seen previously, and could lead to further buying and gains this week.

Oil prices rose sharply at the open in Asia with the NYMEX WTI rising to $104.81(Brent $120.74) after Iran halted oil shipments to French and British companies. Oil appears to be edging towards the record nominal high of $140 per barrel. Oil prices in euros have edged to record levels again.

WTI Crude Future Daily – (Bloomberg)

A military confrontation with Iran seems almost inevitable and the drums of war grow louder by the day in circumstances akin to those preceding the war in Iraq in 2003. 

Senior officials in the Obama White House said over the weekend that if sanctions do not work, the military option is likely. "Sanctions are all we've got to throw at the problem. If they fail then it's hard to see how we don't move to the 'in extremis' option."

The White House has said repeatedly that all options are on the table, including the use of force to stop Iran obtaining a nuclear weapon, but that for now the emphasis is firmly on diplomacy and sanctions.

"We don't see a way forward," said one official. "The record shows that there is nothing to work with."

Deepening tensions with Iran and the possibility and indeed increased likelihood that the current trade and currency wars will lead to military confrontation is an important reason to own physical gold and silver. Surging oil prices will of course be inflationary and affect consumers globally at the pump.

Should the situation deteriorate, inflation hedging and safe haven demand could increase significantly, even beyond the levels seen in recent months. 

(Bloomberg) -- Asia Precious Metal Storage Boosted on Bank Demand
Malca-Amit Global Ltd., a Hong Kong- based company that stores and transports precious metals and diamonds, plans to open a vault in Beijing and is doubling space in Singapore as rising demand spurs gold’s 12th year of gains.

The Beijing facility at the city’s airport will open by the end of the year, Ofer Wilner, regional manager of the Far East unit, said in an interview. A $2-million expansion at the Singapore FreePort will be ready in six months, adding three vaults to the existing pair, which are 80 percent full, he said.

Malca-Amit, founded in Tel Aviv in 1963, is joining lenders such as Deutsche Bank AG and storage companies including The Brink’s Co. in opening or expanding vaults to tap demand for secure space to house commodities used to protect wealth. China may become the world’s largest gold market this year, displacing India, according to the World Gold Council.

“The whole point of owning gold or buying gold is that you’re buying a form of financial insurance,” said Mark O’Byrne, executive director of Dublin-based GoldCore Ltd., which stores customers’ bullion at the Perth Mint in Western Australia and in a depositary in Switzerland. “You need to own gold in the safest way possible in order to reduce counterparty risk.”

(Bloomberg) -- Russian January Gold Holdings Unchanged at 28.4 Million Ounces
Russia’s central bank kept its gold holdings unchanged at 28.4 million troy ounces last month, according to a statement published on its website today.

The stockpile was valued at $48.8 billion as of Feb. 1, compared with $44.7 billion a month earlier, Bank Rossii said.

(Bloomberg) -- Gold Demand in India ‘Quite Likely’ to Gain This Year, UBS Says 
Gold demand in India is “quite likely” to increase this year, UBS AG said. “Gold remains so ingrained in India’s culture that it’s difficult to foresee a time when gold isn’t bought, even above $2,000” an ounce, analyst Edel Tully wrote today in an e-mailed report. “The Indian market can adjust to higher prices, as it’s shown for the past 10 years.”

(Bloomberg) -- JPMorgan Says Is ‘Neutral’ on Commodities Short-Term; Long Gold
JPMorgan Chase & Co. reiterated its “neutral” recommendation on commodities short-term and said it stays long gold.

“We are not seeing the correction we feared,” analyst Jan Loeys wrote in report dated Feb. 17. “We keep a broad overweight of equities, credit and emerging market assets, while staying tactically neutral on commodities and developed markets bond duration.”

JPMorgan remains bullish on commodities in the medium term, according to the report.

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Silver is trading at $33.53/oz, €25.28/oz and £21.13/oz. 

Platinum is trading at $1,645.00/oz, palladium at $694.10/oz and rhodium at $1,500/oz. 

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