Written by Roman Baudzus
Commodity prices are on the way to new record highs; according to the opinion of many market participants, the main reason for this is growing geopolitical tensions. The riots in the Middle East have escalated and the sovereign debt crisis in Europe has once again captured investors´ attention following the resignation of Portugal’s Prime Minister Socrates.
All these events have contributed to increased uncertainty in the financial markets. Michael Widmer, commodity strategist at BofA Merrill Lynch told cnbc.com that the growing geopolitical tensions will provide great support for the gold price. The yellow metal is perceived as a safe haven among capital market investors. The silver price would further benefit from this situation as well.
Related: Why Invest in Gold or Sliver
In yesterday’s trading session, gold climbed to a new all-time high at the New York Comex, reaching $1,448.60 per ounce. After touching this mark, though, the price declined. The gold price recovered at around $1,420 per ounce where it found a floor. Silver, however, continued moving higher. The price of the white metal temporarily climbed to more than $37.25 per ounce, a new 31-year high.
Widmer added that he expected new record commodity prices. He thinks gold will soon reach $1,500 per ounce while his price targets for copper and crude oil were $10,200 per ton and $140 per barrel respectively in the second quarter of this year. Crude oil could possibly rise as high as $200 per barrel. Widmer also argues that US inflation will pick up.
Jeb Handwerger, publisher of the GoldStockTrades.com newsletter, yesterday said in an interview that he expected gold to rise to $1,600 per ounce and silver to $40 per ounce in the near future. The bullish momentum in the precious metals sector wasn't hurt by the latest price correction following the Japanese earthquake.
Precious metals would also benefit from uncertainty in the Middle East. In Yemen, the military has turned against the government, which is on the brink of collapse. Air strikes by the USA, Britain and France have been conducted against the military installations of Libyan dictator Muammar Gaddafi, in order to support the country´s rebels in their fight against the regime. The supply situation at the crude oil markets could further tighten due to this situation, which would boost prices. Moreover investor concern is growing in regard to the tense situation in Bahrain. Saudi Arabia intervened militarily in order to support the country´s Sunni ruling house. Following this, Iran threatened military intervention in favour of its fellow-Shia in Bahrain. Meanwhile in Syria, violent riots between political protesters and the police broke out this week.
In addition, Europe’s sovereign debt crisis has once again returned to the fore. After Portugal’s lawmakers rejected a bill by the government calling for severe spending cuts, Prime Minister Socrates resigned. According to Bloomberg, official EU representatives now expect that the country will need a bailout of up to 70 billion euros. Fitch downgraded the outstanding debt of the country from A+ to A-, and S&P have also downgraded the country.
In Ireland rumours spread that the nationalised Anglo Irish Bank would default on its issued bonds. Moody´s have also significantly downgraded the credit rating of 30 Spanish banks. The country´s savings banks, or "cajas", were particularly hard-hit by the downgrades. Moody´s measures are a sign that the banking crisis in Spain will probably deteriorate further. At yesterday´s European Council meeting in Brussels, EU leaders agreed to the refinancing of the European Financial Stabilisation Fund (EFSF), increasing available funds to 700 billion euros. The EFSF shall hold equity capital in the amount of 80 billion euros, while 620 billion will be granted in the form of state guarantees.
Related: Why Invest in Gold or Sliver
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