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LAWRIE WILLIAMS: Gold advances in an ever-more unstable geopolitical and investment climate.

We are only less than a week into 2016 and the world is having to come to terms already with three of what could classified as ‘black swan’ events.  These are the Saudi execution of prominent Shia Muslim cleric Nimr al-Nimr, which has massively increased tensions in the increasingly volatile Middle East; North Korea’s reported underground testing of a hydrogen bomb; and the 7% one day fall in the Shanghai stock market.  At this rate we could see 150 or so ‘black swans’ hatching this year.  Probably  unlikely, but the start to the year has very much created some major uncertainties in the markets and gold has been the major beneficiary.  At the time of writing it had risen up through the $1,090 level, and was trending higher, despite the dollar index rising too.  Usually gold falls on a rising dollar.

The stock markets are also down substantially around the world (except in China where there was a small recovery), with the S&P 500 opening below the key 2,000 level and the Dow below 17,000 despite some positive US economic data.  Gold has been performing in its safe haven role and if the markets manage to close at the plus $1,090 level then this could unleash some serious short covering from all the shorts in the market which could drive it back up above $1,100 – a level last seen in late October last year.

So let’s look at the events which have precipitated the rise.  The Saudi execution has hugely increased tensions between the two biggest regional powers, Iran – largely Shiite and Saudi Arabia – largely Sunni.  This has potentially serious implications in any ongoing agreements aimed at curbing Islamic State (Daesh).   With economic sanctions against Iran having been lifted the country will be aiming to raise its oil exports – and again the rift with the Saudis means that the region’s two largest oil producers are hugely unlikely to agree any production cutbacks to try and stabilise the falling oil price.  While consumers in the West may benefit, it could seriously impact on the overall US economy given the US itself is such a major oil producer with thousands of jobs at stake at the already financially stretched major oil companies – and probably an even stronger impact on the small and mid-sized oil industry dependent companies.  This could well continue to affect the stock market – which has in reality been pretty well flat for a year or more – which could raise the profile of gold and silver as potentially valuable asset classes.

North Korea’s announcement of a successful H-bomb test – although dismissed by some experts as more likely yet another A-bomb test (but this could be government generated mollifying propaganda) was perhaps a significant factor behind the rise in the gold price today.  With North Korea’s leadership continually being portrayed in the West as being hugely unstable and unpredictable, coupled with its known missile development programmes, just raises geopolitical uncertainties in the Far East and further afield.

The big fall in the Shanghai stock market has further highlighted worries about the strength of the Chinese economy and the ability of that nation’s government to maintain its growth targets.  This was highlighted by the fact that although the gold and silver prices rose, those for platinum and palladium (where China is seen as the major growth markets for the future) both fell.  There have been many analysts predicting a major global stock market downshift this year.  If what has happened this week so far is a precursor to such a downturn remains to be seen, but it should be worrying to stock investors everywhere.

One of the principal reasons that gold and silver have been out of favour with investors is that over the past 5 years the general equity markets, buoyed by Central Bank Quantitative Easing programmes, have been seen as producing far better returns.  But as geopolitical uncertainties escalate, and equities markets are seen as increasingly vulnerable, the move back into gold (with its continuing strong fundamentals) could be just beginning.  (But then be warned, gold started 2015 relatively strong and then fell back as the year progressed to hit new interim lows.  Nothing is ever certain in the markets – there are too many major vested interests in gold in particular, some of which still have the potential to disrupt what might appear to be the natural course of events.)

06 Jan 2016 | Categories: Gold

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