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Gold
GOLD prices have risen to fresh 25-year highs as mounting tension over Iran’s nuclear programme induced buying of the metal for safe haven purposes. In the London market, gold prices are heading towards $700 an ounce on firm oil, a weaker dollar and political tension in the Middle East.
Gold, which has raised $230 or 54 per cent in the past 12 months, has been attracting money from other markets because of its strong performance. The trend is seen continuing, but gold is also becoming vulnerable to a deep correction, dealers said. A weaker dollar, higher oil prices and inflation concerns are causing this move.
Geopolitical tensions are growing after the International Atomic Energy Agency reported Iran had ignored a call to halt nuclear activities and accelerated its uranium enrichment programme.
In the London market, spot gold XAU jumped to $665.20 an ounce on May 2, the highest since October 1980. The dollar declined towards a recent one-year low against the euro after gains earlier during the day. A weaker US currency makes dollar-denominated gold less expensive for holders of other currencies and lifts gold demand. Dealers said any sharp rise in the dollar could be an excuse for a long liquidation in gold. The metal has risen 28 per cent this year and doubled in three years.
Oil market profits are being diverted into gold in some instances as oil traders look to bank profits in this area, preferring gold as a potentially more stable alternative investment, said John Meyer, analyst at Numis Securities Ltd. Oil rose above $74 a barrel on May 2, pushed higher by persistent fears about supply disruption, especially from Iran.
Gold is often seen as a safe-haven buying in difficult times. People also consider it as a hedge against inflation. Investors remained upbeat because of strong returns in the gold market compared to other assets.
As the CPM Group a New York-based metals research firm, reports in its recently released “Gold Yearbook 2006,” a major expansion is under way in mine production around the world; secondary recovery from scrap has been rising; and funds spent on gold exploration have reached record levels.
Ownership of gold by speculators has already reached a kind of critical mass. According to CPM’s estimates, speculators now hold about 1.1 billion ounces. For the first time in history, they own more than is held by government central banks. Compare that 1.1 billion with total ornamental and industrial demand in 2006 of a projected 81.3 million.
The demand-side parallels between today and the run-up to $850 by January 1980 are eerily striking. The main difference is that the post-9/11 world has lent them renewed intensity. For example, notes the CPM Yearbook, the freezing of Soviet and Iranian assets in the late 1970s sparked a flight of capital out of the industrialized economies into gold. The 2003 invasion of Iraq, and the recent call for sanctions against Iran, has prompted a renewed flight into the metal as a haven throughout the Middle East and elsewhere.
Meanwhile, silver soared after the launch of the first ever silver exchange traded fund, which is expected to boost demand of physical bullion. Silver, in the last days of April was quoted at $13.38/13.48, an ounce after jumping to $13.63, compared with $12.61/12.71 in New York, but still well below a 23 year peak of $14.68 in the third week of April.
Oil
OIL prices have risen to record highs in recent days. On May 2, in the London market, IPE Brent crude futures reached a new record high of $74.97 on persistent fears about supply disruptions, especially from Iran, and aggressive fund buying across the commodities sector.
Prices are close to the record high of $75.35 for the US crude touched in April, which was largely driven by concern that Iran’s stand-off with the West over its nuclear programme could lead to disruption of its oil output.
The UN ambassadors from the United States, Britain and France are expected this week to introduce a Security Council resolution to make Iran, the world’s fourth biggest oil exporter, comply with demands to halt uranium enrichment.
Apart from Iran, the shutting of around a quarter of Nigeria’s crude because of militant unrest has boosted interest in the oil futures market and helped to lure investment fund and hedge fund money, which has flooded in across the commodities complex.
On the following day, oil dropped towards $73 a barrel after a US government report showed a surprise increase in gasoline inventories, easing worries about a supply crunch ahead of summer when demand peaks.
Gasoline stocks in the world’s largest oil consumer rose by 2.1 million barrels in the latest week, in contrast to expectations of a drop, the Energy Information Administration (EIA) said. It was the first increase since February.
The latest report from the EIA could be a sign that we’ve really turned the corner on refineries, said Phil Flynn, analyst at Alaron Trading in Chicago. Barring any new headlines of refinery trouble or some strong geopolitical developments from Iran or any other big producer, we may have seen the top for crude oil at this point.
