Geopolitical Environment Favourable for Gold and Silver Prices

Written by Roman Baudzus


The gold price recovered in Friday's trading session, with the US dollar again under pressure against other major currencies. Besides the falling external value of the dollar, the announcement of a rising gold position in one of the world’s largest Exchange Traded Funds (ETF) was a good supporting factor for gold. In addition, political tensions in the Middle East are once again in the media's focus. This morning the United Nations Security Council announced that a resolution calling for air strikes against Colonel Muammar al-Gaddafi's Libyan regime had been passed. In Bahrain the situation also escalated after Iran repeated its verbal threats against Saudi Arabia.

Recently, Japanese investors have been busy selling American assets in order to boost their cash reserves, raising the JPY/USD. The weakening dollar has provided support for precious metals prices.

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macro_gold_gearsUncertainty still surrounds the Fukushima nuclear power plant, and more bad news about the nuclear reactors will likely have bad effects on the global economy. Many economists warn of global supply chain disruptions as a result of events in Japan. Yesterday evening, General Motors (GM), announced on its website that it would be suspending production at its Shreveport car plant in Louisiana, owing to Japanese supply disruptions. This situation will likely lead to lower platinum and palladium prices, since strong demand for these metals comes from the automobile industry. In Japan, the assembly lines of major car producers are still on hold as the earthquake and tsunami have disrupted electricity generation.

In other news, SPDR Gold Trust (GLD), the largest ETF in the gold sector, announced yesterday that its gold positions had climbed to 1,217,295 tonnes on March 16, up from 1,212,745 tonnes the previous day. Nevertheless, GLD's gold position has reached its lowest level since May 2010. At the New York COMEX, the April gold futures contract recovered by $8.10 to $1,404.20 per ounce in yesterday's trading session. The trading volume at the COMEX was, however, three times lower compared with Wednesday, and traders spoke of a technical reaction that could be followed by further price setbacks. At the beginning of the day the silver price also gained, though the white metal fell in the afternoon.

Economists predict that the deteriorating geopolitical environment will be a support factor for precious metals. Under threat of western airstrikes, Colonel Gaddafi has warned that his armed forces will attack flight and marine traffic in the Mediterranean if Libya is attacked by outsiders. Meanwhile in Bahrain, the invasion by Saudi Arabian troops has led to a further deterioration in the emirate's political and economic situation. The local stock market was closed and the country's Sunni ruling house clings to the military aid commitments of the intervening Gulf states in order to regain control over the country's violent Shiite protestors. Political experts have warned of a new Gulf war if Iran should decide to support its fellow-Shiites in Bahrain with military force. Gold and silver prices will likely rise with investors' growing fears of military activity in the Middle East.

Source: Gold Money

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