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Unrest continues across North Africa
and the Middle East . . . and gold, reverting to its historic role as the
preeminent safe haven, is reflecting the day-by-day rise in uncertainty -
both political and economic.
Arabs of every persuasion have been
heading to the souks, their local gold shops, stocking up as a precaution
against political unrest and economic uncertainty - after all, physical gold
in the form of small bars and investment-grade jewelry travels well should
they need to take flight.
Asian Buying Remains
Strong
At the same time, Indian and Chinese
investors and speculators are watching developments in the Arab world . . .
and many are buying gold on the expectation of still-higher prices ahead.
Jewelry and bar demand across eastern
Asia was super-strong over the past year, reflecting both rising household
income and rising inflation from one country to the next. Now, buyers
are even more eager to stock up on gold - some just hoping to make a quick
profit and others worried about the economic and inflationary consequences of
rising oil prices in their own economies.
Institutional
Investors Returning to Gold
In recent months, some hedge funds and
institutional investors cashed in their gold exchange-traded funds (ETFs) to
book profits and redeploy assets to take advantage of rising equity
markets. The associated sale of gold held in depositories on behalf of
ETF investors offset much of the Chinese and Indian buying late last year and
early this year, buying that might have otherwise pushed the metal’s
price higher.
But now, rising uncertainties and a big
jump in oil prices are beginning to dash expectations of rising stock markets
- and we could soon begin to see a return flow of funds from equities back
into gold. With the physical market already tight - thanks in part to
Asia’s continuing appetite for gold - renewed institutional investor
interest in the metal could result in a surprisingly swift price advance.
No End to Uncertainty
Despite gold’s big advance in the
past few weeks, the markets may be underestimating the long-term consequences
of regime change across North Africa and the Middle East.
Some of these countries play pivotal
roles in the world economy, largely as oil producers, and some also play
important geopolitical roles. Many have deep historic tribal and
sectarian rivalries that have been kept under control by iron-fisted despotic
rule. What will fill the void as regimes topple is anybody’s
guess.
Rising unemployment and high food
prices fed widespread social discontent and fueled the political uprisings
across the region. The overthrow of existing regimes may prove easy
compared to the difficult and uncertain establishment of stable, secular,
democratic governments.
However positive regime change may be
in the longer term, the short-term economic consequences could be quite
devastating - with local economies in disarray, high if not rising
unemployment, still-higher food prices, and possibly outright shortages of
food and other consumer goods.
At the same time as local economies
struggle, triple-digit oil prices - if sustained - will undoubtedly fuel
global inflation and retard economic growth . . . or worse yet, plunge us
into renewed recession with falling output and rising unemployment not only
in the industrial nations but in the emerging economies - including the likes
of China, India, and Brazil - that largely avoided the past downturn.
Undoubtedly, politicians and central
bankers around the world, hoping to mitigate unacceptably high unemployment,
will again respond with counter-cyclical monetary and fiscal policies -
policies that promise rising inflation and much higher gold prices ahead.
Jeffrey
Nichols
NicholsonGold.com
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