Gold Flat lines Despite Russian Threats to Cut Europe's Oil and Gas

By: Mark_OByrne

Gold has flat lined and is marginally higher this morning with the dollar marginally lower and oil marginally higher on continuing concerns about the possible impact of tropical storm Gustav.

Gold has been gradually edging higher for the last two weeks and appears to be ready to rally in the seasonally strong autumn months due to the strong fundamentals. Especially given deepening concerns regarding the global economy, heightened geopolitical risk on increasing tensions in Russia and the continuing supply demand issues in the physical bullion market.

Bullion Coins and Bars - Availability, Delivery and Premiums
Shortages of certain bullion products in possibly the most important issue facing the gold and silver markets today.

Premiums on nearly all gold and silver bullion products continue to rise significantly. Some products are actually increasing on a daily basis. As reported in Bloomberg and Marketwatch (see news) yesterday, we are now paying a wholesale premium of 3.8% over spot for Krugerrands in volume, up from 3.2% the day before.

Some of the largest wholesalers in the U.S. have no stock left of silver bullion coins (Eagles and Maples) and silver bullion bars (1, 10 and 100 ozt) and only have 90% and 40% silver bags. Increasingly there are delivery delays on a swath of bullion products including on older European coins including British sovereigns. Some wholesalers are not just talking about delays of a few weeks but delivery delays into 2009 on certain products.

These shortages are leading to premiums going up sharply on all bullion products . Some large wholesale bullion dealers have assigned and appointed a dedicated person to monitor pricing and raise premiums as required in accordance with lack of supply and rising demand.

Bloomberg reported yesterday how the largest gold refinery in the world was out of inventory of gold Kruggerands due to just one sizeable order from Switzerland of 5000 Krugerrands. This would be worth a measly $4,160,000 (5000 X $832) and this shows how small the precious metals markets are vis-à-vis the bond, equity, currency and derivative markets. It is more than likely that a tiny fraction of these international capital markets has realised the supply demand issues in the physical market and is following the smart money and this will likely lead to huge moves up in precious metal prices. This should lead to the inflation adjusted price of $2,300 per ounce being reached in a matter of weeks rather than a matter of months and years.

Putin Accuses U.S. and Russia Threatens to Cut Oil and Gas Supplies to Europe
Tensions with Russia continue to escalate as President Putin has accused the U.S. of having operatives in Ossetia at the start of the conflict. In a CNN interview Putin said that "the American side in fact armed and trained the Georgian army." He accused the U.S. of provoking the conflict in order to help benefit the Republicans and John McCain’s electoral campaign. Extraordinary and explosive claims that show that relations are deteriorating sharply between the U.S. and Russia. The White House said the claims were “patently false” and “ill advised”.

Meanwhile Russia has tested a long-range 'stealth' missile which has a range of 6,125 miles and can carry one 550-kiloton warhead - putting Europe and much of the US within reach. This is being seen as a calculated show of strength in the face of mooted EU sanctions and threats of “hard headed engagement” from Nato.

Most importantly, Russia has made sounds regarding cutting oil and gas supplies to Europe. The Telegraph reports (see our News section), that “Fears are mounting that Russia may restrict oil deliveries to Western Europe over coming days, in response to the threat of EU sanctions and Nato naval actions in the Black Sea. Any such move would be a dramatic escalation of the Georgia crisis and play havoc with the oil markets. Reports have begun to circulate in Moscow that Russian oil companies are under orders from the Kremlin to prepare for a supply cut to Germany and Poland through the Druzhba (Friendship) pipeline. It is believed that executives from lead-producer LUKoil have been put on weekend alert. "They have been told to be ready to cut off supplies as soon as Monday," claimed a high-level business source, speaking to The Daily Telegraph. Any move would be timed to coincide with an emergency EU summit in Brussels, where possible sanctions against Russia are on the agenda.”

There is a huge game of international brinkmanship going on and it would appear that Russia has the better cards and may be calling the west’s bluff. Russia’s huge oil and gas reserves would appear to be the ace in the pack and a trump card that may be used - if push comes to shove. However, there are increasing risks to both sides and if sensible honest brokers do not prevail there may be serious ramifications for global markets.

Today's Data and Influence
There are several key reports due for release from the US today. They including PCE, personal consumption, personal income, Chicago PMI and the University of Michigan consumer sentiment survey. Chicago PMI in August is expected to slip to the key 50-level, down from 50.8 from July.

Gold and Silver
Gold is trading at $833.60/833.90 per ounce (1200 GMT).
Silver is trading at $13.73/13.77 per ounce (1200 GMT).

PGMs
Platinum is trading at $1463/1483 per ounce (1200 GMT).
Palladium is trading at $296/302 per ounce (1200 GMT).

By Mark O'Byrne, Executive Director

Gold and Silver Investments Ltd. have been awarded the MoneyMate and Investor Magazine Financial Analyst of 2006.

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