Gaza War set to hike oil and gold prices
Posted on 04 January 2009 with no comments from readers
Strangely economic commentators have missed the most obvious impact of the tragic Gaza War on the global economy: oil prices are going to rise, and will go sharply higher if the war widens into a regional conflict, so too will precious metal prices. Perhaps this perception will change now that a serious ground offensive has started.
Higher oil prices will be the death knell for the recent modest rally in global stock markets and the impact of higher energy costs on a weakened world economy would be nasty. This is back to 1973 and the oil embargo years, and the horrendous stock market slump of 1974.
Some might argue that with the S&P down 38 per cent last year, stocks have seen their annus horribilis. But sadly stocks are still over-valued in historic terms and not near to the level required for a stock market bottom; on the Q-formula they still have a 55 per cent downside.
Oil price shock
Rising oil prices are just the kind of shock the global economy and stock markets could do without now as they struggle to rally. There does not seem the political will among Arab leaders for an oil boycott like in 1973 but the popular feeling against Israel’s disproportionate response to rockets fired from Gaza is mounting.
Dubai, Jordan, Syria and Egypt cancelled their New Year’s celebrations as a mark of solidarity with the people of Gaza, although political support for Hamas is another matter.
Regional war threat
The more likely threat to oil prices comes from a widening of the Israeli offensive to include another incursion in to Lebanon to fight a re-armed Hezbollah, although their last attempt in 2006 is widely perceived as having failed in its objectives.
On the other hand, what began as a series of air raids with hundreds of civilian deaths is clearly developing into something more on the lines of the Lebanon War of 2006, and the implications for the oil price this week are obvious.
Gold, silver and the US dollar are likely to gain in value in a flight to safety but this is negative for most other asset classes.
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no Comments posted by readers:
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Don’t forget about the 2nd front… India-Pakistan.
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Fed wants quantitative easing, – good for gold
I do not know about what will happen with the war but increase in oil prices is something that will help gulf nations. Something that is very ironic.
From The Daily Telegraph today about Merrill Lynch on gold’s outlook:
Gary Dugan, the chief investment officer for the US bank, said there has been a remarkable change in sentiment. “People are genuinely worried about what the world is going to look like in 2009. It is amazing how many clients want physical gold, not ETFs,” he said, referring to exchange trade funds listed in London, New York, and other bourses.
“They are so worried they want a portable asset in their house. I never thought I would be getting calls from clients saying they want a box of krugerrands,” he said.
Merrill predicted that gold would soon blast through its all time-high of $1,030 an ounce, and would hit $1,150 by June.
The metal should do well whatever happens. If deflation sets in and rocks the economic system it will serve as a safe-haven, but if massive monetary stimulus gains traction and sets off inflation once again it will also come into its own as a store of value. “It’s win-win either way,” said Mr Dugan.
He added that deflation may prove the greater risk in coming months. “It’s very difficult to get the deflation psychology out of the human brain once prices start falling. People stop buying things because they think it will be cheaper if they wait.”
Merrill expects global inflation to hover near zero, with rates of minus 1pc in the industrial economies. This means that yields on AAA sovereign bonds now at 3pc will offer a real return of 4pc a year, which is stellar in this grim climate. “Don’t start selling your government bonds,” Mr Dugan said, dismissing talk of a bond bubble as misguided.
He warned that the eurozone was likely to come under strain this year as slump deepens. “There is going to be friction as governments in the south start talking politically about coming out of the euro.
I don’t see the tensions in Greece as a one-off. It is a sign of social strain in countries that have lost competitiveness.”