Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
JOHNSON & JOHNSON (JNJ) Big Pharama AI Mega-trend Investing 2020 - 25th Jan 20
Experts See Opportunity in Ratios of Gold to Silver and Platinum - 25th Jan 20
Gold/Silver Ratio, SPX, Yield Curve and a Story to Tell - 25th Jan 20
Germany Starts War on Gold  - 25th Jan 20
Gold Mining Stocks Valuations - 25th Jan 20
Three Upside and One Downside Risk for Gold - 25th Jan 20
A Lesson About Gold – How Bullish Can It Be? - 24th Jan 20
Stock Market January 2018 Repeats in 2020 – Yikes! - 24th Jan 20
Gold Report from the Two Besieged Cities - 24th Jan 20
Stock Market Elliott Waves Trend Forecast 2020 - Video - 24th Jan 20
AMD Multi-cores vs INTEL Turbo Cores - Best Gaming CPUs 2020 - 3900x, 3950x, 9900K, or 9900KS - 24th Jan 20
Choosing the Best Garage Floor Containment Mats - 23rd Jan 20
Understanding the Benefits of Cannabis Tea - 23rd Jan 20
The Next Catalyst for Gold - 23rd Jan 20
5 Cyber-security considerations for 2020 - 23rd Jan 20
Car insurance: what the latest modifications could mean for your premiums - 23rd Jan 20
Junior Gold Mining Stocks Setting Up For Another Rally - 22nd Jan 20
Debt the Only 'Bubble' That Counts, Buy Gold and Silver! - 22nd Jan 20
AMAZON (AMZN) - Primary AI Tech Stock Investing 2020 and Beyond - Video - 21st Jan 20
What Do Fresh U.S. Economic Reports Imply for Gold? - 21st Jan 20
Corporate Earnings Setup Rally To Stock Market Peak - 21st Jan 20
Gold Price Trend Forecast 2020 - Part1 - 21st Jan 20
How to Write a Good Finance College Essay  - 21st Jan 20
Risks to Global Economy is Balanced: Stock Market upside limited short term - 20th Jan 20
How Digital Technology is Changing the Sports Betting Industry - 20th Jan 20
Is CEOs Reputation Management Essential? All You Must Know - 20th Jan 20
APPLE (AAPL) AI Tech Stocks Investing 2020 - 20th Jan 20
FOMO or FOPA or Au? - 20th Jan 20
Stock Market SP500 Kitchin Cycle Review - 20th Jan 20
Why Intel i7-4790k Devils Canyon CPU is STILL GOOD in 2020! - 20th Jan 20
Stock Market Final Thrust Review - 19th Jan 20
Gold Trade Usage & Price Effect - 19th Jan 20
Stock Market Trend Forecast 2020 - Trend Analysis - Video - 19th Jan 20
Stock Trade-of-the-Week: Dorchester Minerals (DMLP) - 19th Jan 20
INTEL (INTC) Stock Investing in AI Machine Intelligence Mega-trend 2020 and Beyond - 18th Jan 20
Gold Stocks Wavering - 18th Jan 20
Best Amazon iPhone Case Fits 6s, 7, 8 by Toovren Review - 18th Jan 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Gold and Oil, Where to Go if the Middle East Explodes!

Commodities / Gold and Silver 2013 Sep 14, 2013 - 10:48 AM GMT

By: Julian_DW_Phillips


The Oil Price...if the Middle East Explodes

We preface by saying that this is still a "what if" scenario...

In the unlikely event that a limited strike on the Syrian government's ability to launch nerve gas on its population through air strikes, rocket attacks or artillery shells has no other effect on the religious war, then we doubt that the impact of such a strike will send shock waves throughout the Middle East.

But, such a strike would weaken the government's heavy weapons capacities, and so even the battlefield for the Sunni rebels against the Shi'ite government and increase the ferocity and sectarian nature of the war. At some point (as with that first gunshot that started the First World War) sectarian ferocity would infect other nations and bring new destructive tactics to the war on a regional basis.

Questions that then need to be asked are:

  • Would Shi'ites turn on the oilfields in their area, such as in Saudi Arabia and other West Persian Gulf States and damage production? That alone would send the oil price over $150 or higher as supplies became interrupted and vulnerable. The speed with which Kuwaiti oilfields were repaired gives us a time perspective on how long successful repairs to interrupted oil fields would take. But that would not remove the Shi'ite workers from those regions. The implications are that Saudi as well as U.S. [?] troops would be used to guard those fields, quickly.

  • Would Iran be emboldened to interfere with the oil passing through the Straits of Hormuz? This seems unlikely for while it is the jugular of Middle Eastern oil, the U.S. has placed its navy so as to prevent that from happening. Nevertheless threats of such action would warrant nations stocking up their oil supplies, taking prices even higher.

  • Because of the ongoing risks, would global financial markets keep oil prices high until the conflict were over? We think that prices over $150+ a barrel, would deeply impact global economic growth and inflation, affecting nearly all people on earth. This alone would be a game-changer for all financial markets.

Middle East Oil Production Chart

Not only that, the average person worldwide would become emotionally involved in the conflict. This would lead to a considerable deepening of the consequences of the battle that would place the world of Islam against commerce and politics.

It may well be that the United Nations would be given considerably more power to deal with this in that event?

Role of Gold in such Extreme Times

Getting & Paying for Oil

We now turn from the individual's reaction to an oil price over $150 -over $200? -- to government's reactions to getting and paying for the oil it needs.

At such prices, national foreign exchange reserves -with which to import oil -- would diminish quickly. As a result, importing nations would suffer rising trade deficits. It would become critically and strategically important to keep the oil price down around $100, or see the global economy falter and buckle.

World Oil reserves By region Pie Chart

China with its $3.5 trillion in reserves would be better placed than all other nations except the U.S. (who can still 'print' dollars) to weather such a storm. For them the issue would reduce simply to the quantity of supplies it could get to go forward with. The increase in local supplies from 'fracking' would certainly help in this regard.

Securing sufficient oil supplies to fuel other economies would become a nightmare, leading to potential rationing in such nations, as well as to further decays in trade deficits as their economies faltered.

Consequently, exchange rates would be decimated against the USD, which would certainly remain the currency in which oil would be paid for (except Russia and the nations ruled by Shi'ites, a much smaller quantity) worldwide.

In such an escalation everyone will be involved with the issues in one way or the other.

If this scene were to happen, then the credibility of most currencies would be at stake. Such a scene would qualify as 'extreme times' in which gold becomes money.

When the 'carry trade' in the developed world's banks invested in the emerging world, those nations built up their reserves with such 'hot money' and as it now departs, those countries allow their exchange rates to fall, building up int'l competitiveness as well as preparing for the next set of currency crises. They have not depleted these new found reserves. While these will serve under such conditions, they will need to be augmented to cope with the crisis longer term.

But under these conditions, those reserves would dwindle quickly. More importantly the creditworthiness of non-oil producing nations, in the eyes of oil suppliers, would drop fast.

It's doubtful that an oil supplier would risk his scarce supplies if he doubted the ability of a buyer to source USDs. It may be that most oil suppliers would be prepared to accept the Chinese Yuan then.

But oil suppliers would want payment in a more reliable manner. That's where nationally-owned gold would come in.

A nation's gold reserves is usually stored 'unallocated' in the Federal Reserve in the U.S., or the Bank of England in London, or in the Banque de France in Paris.

It would be a safe way for an oil supplier to ask for that gold to be pledged against a bill for oil on the oil-buying nation. At that point, national gold reserves would become vital in the continuation of oil supplies and would probably act as collateral for dollar loans/Yuan with which to buy oil.

And as such, the need to increase the national reserves of gold would become critical!

Gold Price in Such a Scene

With the present world stability upended by such a war and its ripple effects, uncertainty would rule. The world would be shaken in a way not seen since World War 2. At such times, gold would become a strategic asset. It would be considered by gov'ts to be in the national interests to secure as much as possible.

With gold supplies from mining being so inflexible and limited to around 2,800 tonnes a year, the only other source of gold would be gold sold into the market from current holders. To persuade them to sell under such unstable market conditions (for paper currencies) gold prices would rise to prices way above those even contemplated. Even then we doubt that governments would be able to buy enough gold.

At such times we would not see just a few emerging nations buying gold, but a considerable number of them. The market would become disorderly but uncontrollable. No government would be able to control it.

No nation would be able to allow that. They would not tolerate a host of private buyers and speculators playing around with the price. They would want a clear run at all available supply. But the competition from other governments in the market would be overwhelming. Other tactics would be brought to bear when government competes with government!

For nations already producing gold, the answer would be simple. As China, the world's biggest gold producer, and Kazakhstan are already doing, the immediate source of gold would be from their local mines. All local production would be diverted to the national reserves kept within their borders. Other nations would do likewise with any available locally-owned gold, in the interests of national security.

What would this do to the supplies of gold to the international markets in London and elsewhere? They would dry up. It would be unlikely that there would be a private market for gold.

With gold such a strategically important asset and money, only one further source of gold would exist -their own people!

Hold your gold in such a way that governments and banks can't seize it! Enquire @

Gold Forecaster regularly covers all fundamental and Technical aspects of the gold price in the weekly newsletter. To subscribe, please visit

By Julian D. W. Phillips
Gold-Authentic Money

Copyright 2012 Authentic Money. All Rights Reserved.
Julian Phillips - was receiving his qualifications to join the London Stock Exchange. He was already deeply immersed in the currency turmoil engulfing world in 1970 and the Institutional Gold Markets, and writing for magazines such as "Accountancy" and the "International Currency Review" He still writes for the ICR.

What is Gold-Authentic Money all about ? Our business is GOLD! Whether it be trends, charts, reports or other factors that have bearing on the price of gold, our aim is to enable you to understand and profit from the Gold Market.

Disclaimer - This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold-Authentic Money / Julian D. W. Phillips, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold-Authentic Money / Julian D. W. Phillips make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold-Authentic Money / Julian D. W. Phillips only and are subject to change without notice.

Julian DW Phillips Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules