LAWRIE WILLIAMS: Black Swans hatching – gold advances

The first day of trading of the 2016 year has already seen fireworks.  Gold has risen by around 2% at over $1,080 at the time of writing, and European stock markets are already down around 3%, following a massive 7% fall overnight in China and big falls also in Hong Kong (2.6%) and Tokyo (3%).  At the moment gold’s momentum appears to be upwards and the European stock markets are downwards.  All eyes are on Wall Street and that has opened down very sharply too.

The first ‘black swan’ of 2016 has already arrived with Saudi Arabia’s execution of high profile Shia cleric Nimr al-Nimr.  This has brought the two regional powerhouses – Saudi Arabia (mostly Sunni Muslim) and Iran (mostly Shia Muslim) – into serious so-far rhetorical conflict.  Most of the seemingly ever escalating tensions in the Middle East are due to centuries old conflict between Sunni and Shia Muslims with, in effect, Saudi Arabia and Iran waging proxy wars with each other through their support for their favoured factional elements in Syria, Iraq and Yemen.  Anything that raises tensions in this most volatile of regions, which also sucks in Western involvement, raises global uncertainty and, at least in theory, increases safe haven demand for gold.

How much tensions in the Middle East had to do with the fall in the Chinese stock market, and in other Asian markets remains uncertain.  In China there were also worries concerning some more adverse economic data and about the possible continuation of the devaluation of the Yuan against the US Dollar.  All these will have been contributory factors.  But one suspects the European and initial US market falls and gold’s price rise will have been as much about the geopolitical fallout from Saudi Arabia’s muscle flexing in making a decision which was bound to inflame Iran and Shias everywhere.  It makes for additional problems for the West in holding anti-Islamic State alliances together – particularly when there is evidence that much of fundamentalist Wahhabi Sunni dominated Islamic State funding comes from Wahhabi Sunni Saudi Arabian support (as did that for Al Qaida before it).  Also, the U.S. in particular remains extremely suspicious of any alliance with Iran which has been supporting militarily moves against Islamic State in Iraq, but sides with the Bashar al-Assad Government (Alawite Shia) in Syria, and Hezbollah (Shia) in Lebanon, which are very much opposed by the U.S. and most of its allies.  The other major power player in the region, Russia, which has had problems with its own Chechen Sunnis, seems more prepared to ally itself with the Shia factions.

And then there are the Kurds who are arguably making more progress in opposing Islamic State than any other grouping.  Kurds are Arabic and primarily Sunni Muslims (although there are Shia, Christian and Jewish Kurds) but have a different culture and language.  They have a more tolerant and relaxed fundamental religious outlook than the other Arab factional groupings and are thus perhaps  more acceptable allies to the West, but are distrusted by the governments of Iraq, Syria and Turkey because of their secessionist ambitions working towards a Kurdish nation.

All these varied alliances and groupings make the Middle East an area which most of the West does  not truly understand and were it not for the region’s vast oil reserves it would probably have been left well alone.  Things look well set to escalate and have the potential to pit superpower against superpower – the downing of the Russian bomber by a NATO-allied Turkish fighter jet last month is yet another indicator of growing tensions.

But the very fact that this first ‘black swan’ has hatched so early in the year does not bode well for the months ahead.  And if the stock market falls are an early sign of continued market collapses ahead we could be in for a devastating year for many investors.  With Chinese economic growth continuing to slow (although still rising at a rate most western nations would love to emulate) the industrial metals mining sector may well remain depressed.  It remains to be seen whether overall Chinese demand for gold holds up – we think it will.  If it does then gold may have had a good chance of having bottomed and could see a good return to safe haven buying this year.  If so that will stop outflows from the ETFs (which have been falling anyway) with a correspondingly positive effect on supply/demand fundamentals.  We have already suggested that 2016 could be a crunch year for gold and this all just serves to reinforce this opinion.

 

04 Jan 2016

About the author

Lawrence Williams

Lawrence (Lawrie) Williams is a well known London-based writer and commentator on financial and political subjects, but specialising in precious metals news and commentary. He is a qualified and experienced mining engineer having graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London - recently described as the World’s No. 2 University (after MIT).

e: lawrie.williams@sharpspixley.com