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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Gold Benefits from Geopolitical Risks - Turkish-Iraq Tensions

Commodities / Gold & Silver Oct 17, 2007 - 09:39 AM GMT

By: Gold_Investments

Commodities Gold
Gold was up 30 cents on Tuesday in New York from $756.90 to $757.20. Since then it has traded sideways in Asian and early European trade and is up marginally to near fresh 28 year record highs at $759.20/ 759.70 at 1200 GMT.


Gold remained firm in other currencies and is trading at €535.70 (EUR) and £373.30 (GBP).

Probably the most important news pertaining to the forex and gold markets was the horrendous and unexpected sharp outflow of funds from the U.S. in August. Foreigners dumped a record amount of long-term U.S. securities amid August's market turmoil, raising the spectre of a flight from U.S. assets and the dollar (more below).

Geopolitical risk in the form of the growing Turkish-Iraqi tensions is creating some safe haven demand for gold. Turkey's Parliament is expected to approve a possible cross-border military incursion into northern Iraq today to chase separatist Kurdish rebels despite international calls for restraint. Oil prices remain near record highs above $87 per barrel. It is important not to overestimate the Turkish-Iraqi tensions factor in the surging oil price. As always supply and demand are the fundamental factor and as Barclay's Capital's Kevin Norrish pointed out “rapid tightening of global oil balances as the primary factor behind the move up in prices.”

Oil prices near record highs (especially in conjunction with record prices for most other commodities) and a falling dollar is very inflationary. Data on the U.S. housing market continues to disappoint to the downside and stagflation seems more and more likely.

• Probably the most important news pertaining to the forex and gold markets was the horrendous unexpected sharp outflow of funds from the US in August. Foreigners dumped a record amount of long-term U.S. securities amid August's market turmoil, raising the spectre of a flight from U.S. assets and the dollar.

During a period when the dollar was already falling sharply, the credit crunch, set off by concerns about the falling U.S. housing market, appears to have made foreigners even more wary about buying American assets. The data confirms that investors, particularly in Asia, are moving out of the dollar and this will likely lead to a longer term secular dollar decline. The August outflow exceeded the previous record decline of $21.2bn in March 1990. Japanese and Chinese investors were the biggest sellers with Asian investors dumping $52bn worth of U.S. Treasury bonds alone, led by Japan ($23bn), China ($14.2bn) and Taiwan ($5bn). It is the first time since 1998 that foreigners have, on balance, sold Treasuries.

This could drive the dollar down, U.S. interest rates up and slow U.S. growth even further. It could even lead to a more disorderly collapse in the U.S. dollar akin to what happened to the British pound in 1992. This data is extremely bullish for gold and will likely lead to a large increase in large institutional and central bank diversification into gold, particularly from the U.S.' largest creditors.

• The FT reports that the World Gold Council has cut its forecast for India's gold consumption this year to 15-25% from 40%, in the first sign that record high gold prices are beginning to dent jewellery demand, one of the main supports of gold's recent price surge. The council said that it now expected India to consume 800-900 tonnes this year, instead of an initial forecast of about 1,000 tonnes.

While jewellery demand has been important to the gold price it is only one of the demand factors. In the 1970s, jewellery demand fell sharply as gold moved up from $35 to $200 in 1974, however this did not stop gold from continuing to rise for the rest of the decade and to $850 in 1980. Declining gold jewellery demand was superseded by investment demand for inflation and safe haven reasons and this is likely to happen again. This is especially the case with the advent of many ETFs internationally. Rising prices are more likely to dent demand for platinum and palladium than it is for gold due to gold's continuing and increasingly important investment and monetary status.

Interestingly, the Indian stock market (Bombay Stock Exchange's 30-share Sensex) was halted for one hour after the benchmark index plunged nearly 8 percent early Wednesday, a day after the market regulator moved to curb buying by foreign funds. Jewellery demand in India is not for adornment rather as dowries and for long term investment and saving and turbulence in stock markets will lead to further safe haven and saving demand.

• A clear illustration of how jewellery demand will likely be superseded by investment demand due to macroeconomic and geopolitical risk is seen in yesterday's news that the Japanese investment public with their huge surplus of savings is entering the gold market. Besides Japanese demand there is also increasing demand from other emerging markets, the oil rich Middle East, Russia and China. Emerging markets are experiencing significant economic growth and significant growth in their middle classes. In China alone by 2010, the number of Chinese who make at least $10,000 a year will double from 150 million to 300 million. A decade later, China's middle class will have more buying power than all of Japan.

• Bloomberg reported that 'As dollar sours and oil soars, investors turn to gold'. "Oil is at a record high and in the face of a slumping dollar, you've got a recipe for gold to shoot higher," said Matt Zeman, metals trader at LaSalle Futures Group in Chicago. "The dollar continues to weaken," said Dennis Gartman, economist and editor of the Gartman Letter based in Suffolk, Virginia, who recommended last week that clients buy gold. "Crude oil and other commodity prices continue to rise. And under those circumstances, gold shall continue to move from the lower left to the upper right on the charts."

• Highly respected analyst, Louise Yamada sees gold reaching $3,000 within a decade."Gold is the purest play against the dollar,'' said Louise Yamada, managing director of Yamada Technical Research Advisors LLC in New York, former head of technical research at Citigroup. Yamada is highly respected and was was voted Wall Street's best technical analyst from 2001 to 2004

Forex and Gold
The USD has weakened slightly and is trading at 1.417 (from 1.4130 yesterday) and 2.037 (from 2.0315 yesterday) against the EUR and the GBP respectively.

Despite the dreadful US TIC data, this morning the U.S. dollar is up marginally to 78.234 (from 78.20 yesterday). Support is at its all time record low at 77.657. Should support fail at this level the dollar will likely sell of aggressively to 75.00.

Silver
Spot silver was trading at $13.58/13.60 (1200 GMT).

PGMs
Platinum was trading at $1414/1419 (1200 GMT).
Platinum should remain elevated due to the continuing concerns regarding supplies from South Africa and continuing strong global demand.
Spot palladium was trading at $367/372 an ounce (1200 GMT).

Oil
World oil prices remained at record peaks, holding above $87 in New York, as traders feared that more unrest in crude producer Iraq could further stretch global supplies, which are already stretched.

Gold Investments
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