Gold is marginally lower while silver is showing strength again today after yesterday’s ‘worst ever’ OPEC meeting ended in disarray and saw oil prices surge. The ECB has kept rates on hold and markets await signals as to whether interest rates are set to rise sooner rather than later. Signs of an interest rate rise in July should see the euro and gold rally versus the dollar. The precious metals are also likely to be supported by further sharp falls in peripheral markets bonds, particularly Greece, this morning.
There was a reminder late yesterday that it is not just the Eurozone that is struggling with debt. Fitch Ratings said it would put US debt on watch in early August if Congress fails to raise the federal debt limit.
Oil in US Dollars (WTI) – 12 Years (Weekly)
OPEC, the oil cartel’s increasing impotency was seen yesterday when Libya, Iraq, Angola, Ecuador and Algeria sided with increasingly influential Iran and Venezuela rather than Saudi Arabia and its allies Kuwait, Qatar and United Arab Emirates.
Oil had already been consolidating over $100 a barrel (WTI) and $110 a barrel (Brent) and further signs of the increasing lack of importance of OPEC may lead to higher oil prices.
Geopolitically, the failed OPEC meeting yesterday is important as it signals the declining power of the U.S.’ primary ally, Saudi Arabia.
It also shows Russia’s increasing power on the world stage. Russia is the only country to have increased oil production in recent years, as OPEC exports have fallen.
Leading OPEC nations including Saudi Arabia seem to be reaching or have reached their peak oil production, in what is termed “peak oil.”
Oil in US Dollars (Brent) – 12 Years (Weekly)
Cartels can be successful in the short term but attempts at price fixing or keeping prices near a certain level are always ultimately futile as ultimately supply and demand will always be the final arbiter of price.
The crisis in OPEC comes at a difficult time for oil markets as emerging market demand for oil, particularly from Asia, continues to grow.
Also, Japan’s nuclear crisis is leading to a decline in nuclear energy production, possibly long term in nature, and China’s massive drought has led to marked decline in hydroelectric energy production.
There is increasingly the real risk of an oil crisis especially given the very tense geopolitical situation in North Africa and the Middle East.
It has also increased tensions, which were already very tense, between the U.S. and Venezuela and more importantly Iran.
Gold Adjusted for Inflation (U.S. Urban consumers price index – CPURNSA) – 1971 to Today (Weekly)
“Opec, led by Iran and Venezuela, has snubbed its nose at the United States and the rest of the western nations addicted to Opec oil,” Democratic congressman, Mr Edward Markey said. “This is a clear sign that America must engage in a long-term plan to break our ties to this Opec-controlled market, and prepare to deploy America’s oil reserves now to head off an economic collapse from continued high gas prices.”
Separately, Iran announced it planned to treble its capacity to produce highly enriched uranium which alarmed western powers and was deemed ‘provocative’ by one international relations analyst.
There is the increasing possibility of a 1970’s style oil crises and stagflation which saw gold prices rise 24 times from $35/oz to $850/oz in just 9 years.
Cross Currency Rates
Gold’s price rise since the year 2000 is meager in comparison as gold prices have only risen just over 6 times in 11 years.
Oil prices have risen over 10 times since 1999. For gold prices to just catch up with the price increases seen in ‘black gold’, gold would have to rise over $2,500/oz (10 X $250/oz).
Coincidentally enough this is the inflation adjusted high of 1980 – a level we have long contended gold would likely reach in the course of this bull market.
Should gold match its last bull market performance from the 1971 to 1980, it would have to rise 24 times or from $250/oz to over $6,000/oz.
Something for the perennial gold bubble callers to consider before they continue to discourage people from diversifying into gold.
Silver’s increasing industrial use and demand was confirmed this morning. Bloomberg’s Nicholas Larkin reports that silver usage in solar panels may double to more than 100 million ounces by 2015. Demand for the metal in the applications was about 50 million ounces last year, the Silver Institute said in a just released statement on its website.
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