EDITOR: | June 17th, 2014

Iraq crisis to impact “the sovereign of all sovereigns” — gold prices

| June 17, 2014 | No Comments

The markets have shown their sensitivity to the situation in Iraq and the effect it could have on the world oil market. Last week the U.S. index of crude rose to USD$ 107 a barrel after the Al-Qaeda militants invaded two key Iraqi cities and announced their intention to attack in Baghdad. Inevitably, the outlook of higher crude oil and energy prices will impact North European and especially North American securities, which, after reaching record highs this year, have been deemed overvalued by some analysts. The Iraqi tensions have heightened just as Russia’s Gazprom has announced that it has cut off gas supplies to Ukraine keeping tension high in Eastern Europe as well.

As investors consider the impact of renewed fighting and the possibility of a renewed full scale sectarian civil war in Iraq, they may be tempted away from equities and toward traditional safe-haven currencies and especially gold and precious metals – apart from oil which reached a nine-month high on Monday. The rising geopolitical tensions come just as the US Federal Reserve will announce, on Wednesday, whether or not it will press on with its stimulus withdrawal plans. The markets will continue to be sensitive to developments in Iraq, which may or may not include a resumption of US air strikes, even as they watch for any sign that the Fed will start to raise interest rates.

Ultimately, the rapid pace of the rebel jihadists in Iraq and its impact on oil prices has reduced investors’ appetite for risk. European exchanges saw drops on Monday, given the already high price of energy in Western Europe. Investors have been tempted to cash in their profits as new geopolitical risk factors have resurfaced in Iraq, adding to those in Ukraine. The crisis in Iraq has already caused an oil shock, with energy prices spiking as the ISIS Jihadists have advanced their march toward Baghdad. Surely, as the crisis continues, everyone will have to pay more for gas. But the impact extends beyond the pump.

The jihadist rebellion could cause oil production drop to the levels of the period following the US led invasion in 2004, which could lead to a very sharp spike in the price of a barrel – a spike measured in dollars rather than cents. Evidently, such an increase in energy costs would hurt consumers and deal a blow against the slow economic recovery in the West, stalling it and recreating the conditions for a recession in the wake of lower demand. The markets could suffer an extreme ‘spooky’ effect given that the intensifying Iraqi crisis is but one of the conflicts already proceeding at an intractable pace in the Middle East. For one, the crisis will surely add to the already dramatic refugee situation in Syria, spilling into Turkey and beyond, generating enough international uncertainty that it will easily translate to geopolitical uncertainty.

“Gold is the sovereign of all sovereigns” said the Greek pre-Socratic philosopher Democritus. And if his maxim made sense in the V century, investing in gold and precious metals will suddenly make more sense now. On Monday, gold did reach a 14-session high in overseas trading, piggybacking on the problems in Iraq – and Ukraine. Gold did not break the crucial USD$1300 level but the geopolitical issues are not showing any sign of being resolved in the short term, which means the likelihood of gold moving beyond that price, even in the short term, is very good.  Gold is the geopolitical metal; it is real money without counterparty risk, which keeps its value in time. The price of gold is influenced by political events, especially those that have an international impact. That is why it is part of the reserves of most central banks and it cannot be devalued by inflation, (which is one of the main effects of higher oil prices) unlike currencies.


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