Arab Tensions Push Gold Higher

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, managing director of American Precious Metals Advisors and senior economic advisor to Rosland Capital, has been a precious metals economist for over 25 years. This originally appeared in his blog.

About the Author
Jeffrey Nichols

Jeffrey Nichols, managing director of American Precious Metals Advisors and senior economic advisor to Rosland Capital, has been a precious metals economist for over 25 years.

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