Middle East

Iraq (check) Libya (check) Syria,  Lebanon, Somalia, Sudan, Iran

Support is at $1,600/oz, $1,580/oz and below that strong support is seen at the lows reached on September 26th of $1,532.70/oz. Market participants are divided as to whether this is consolidation prior to a resumption of the bull market, whether a further sell off takes place or whether a bear market has commenced. Strong physical demand being seen internationally, but especially in Asia, would suggest that gold may have bottomed and the bull market is set to continue in the traditionally strong autumn and winter months. The fundamental factors that have driven the gold market in recent years - macroeconomic, monetary, systemic and geopolitical risk – also suggest gold’s bull market is set to continue. Geopolitical risk is seen in the bizarre alleged plot by the Iranian revolutionary guard to use a purported Mexican drug dealer to assassinate Saudi Arabia's ambassador to the United States.

"This is a memo that describes how we’re going to take out seven countries in five years, starting with Iraq, and then Syria, Lebanon, Libya, Somalia, Sudan and, finishing off, Iran."

The latest observations the spread of gold's popularity comes from none other than BRIC expert, Goldman's Jim O'Neill, who advises clients in his latest letter that it may be prudent that in addition to China and India as a source of ever increasing demand for gold, it may be time to also add the Middle East to the ever increasing list of investors (typically quite wealthy) who believe in the yellow metal. "Not because of this particular anecdote, but the Middle East being what it is, my meetings involved more discussion about Gold prices than is usually the case in other parts of the world. While the gold bar machine anecdote adds to all the other colourful stories I pick up, the recent remarkable resilience of gold, despite what has happened to silver and other commodities, is rather impressive. This gold price strength may perhaps be just a simple function of both the extremely low level of G7 real interest rates and the prospect that they might not rise anytime soon. I got the impression that there a quite a few bulls of Gold in the Middle East."

Reuters surveyed 32 major oil traders, bank analysts and hedge fund managers in the first week of April, launching the poll after Brent oil gained $8 in five days to surpass $120 per barrel. Two-thirds of those surveyed expect the current rally to fizzle out fairly soon but think oil will roar back above $130 per barrel in the second half of the year. One in five expect oil to hit $150 per barrel by the end of the year. We all like to gripe about greedy traders pushing up the price of oil. But at present, the most important oil-producing region in the world is grappling with fundamental changes, the results of which are almost impossible to predict. Uncertainty makes commodities more expensive. And for at least the rest of the year, uncertainty is the most reliable aspect of oil.

The Nikkei 225 finally saw a rebound yesterday, moving up 5.7% after its biggest two day fall in over twenty years. Nevertheless, the threat of nuclear disaster lingers and investors are demanding higher premiums on the country’s debt. Japan sold ¥1.1T in 20Y JGBs today at 2.13%, steepening the curve. S&P sees Chinese expansion slowing in 2011, forecasting GDP 9.1-9.6% with CPI in the 4.3-4.8% range. PBOC household inflation expectations weakening. February data indicate that money supply and lending activity have slowed, with lending down almost 50% from January’s flows. In its FOMC meeting yesterday, the Fed reported that the economic recovery is on a “firmer footing” while it made no mention of the current turmoil in Japan. The Fed acknowledged an increase in commodity prices, but qualified them as temporary. In our opinion, the Fed appeared more hawkish than in the last meeting in January, especially given the circumstances. The usage of the stronger language, however, does not foretell any significant change in our opinion, but rather should serve to shift the market focus even more towards jobs data. Mortgage applications for last week dropped 0.7% v +15.5% the week prior. Meanwhile, as anti-government protests continued, Bahrain declared a three month state of emergency yesterday. Along with the declaration came a second unit of military support from neighboring Gulf nations and a Fitch ratings downgrade from A- to BBB on the country’s long-term sovereign debt. Bahrain closed its stock market today and CDS spreads widened significantly.

Erste bank has released the definitive report on oil price dynamics (attached) accounting for all the latest geopolitical hoopla. For what it's worth, the Austrian bank is constructive on oil prices, and see substantial upside from here: "We see mainly upside risk for the oil price. Even though the supply in the market is currently still sufficient, we believe that the wave of revolutions will continue to roll and could thus push the oil price to new highs. For technical reasons we therefore expect the upward trend to continue at least in the first half of the year, and we also think that new all-time-highs are possible. As soon as the parabolic phase has been reached, the sentiment starts spiking, and first divergences are emerging, we recommend stops be set. However, it currently seems to be too early for that. We expect an average price of Brent of USD 124 for the full year." 57 pages of pure factual and chart goodness.

Now that the world is focused on the ongoing turbulence in the Middle East, Europe gets a rest from the financial hit men. While Europe ain’t the Middle East, there are lots of connections between the two continents. Many countries within the European Union have citizens with Arabic roots and backgrounds, and the Islam is a second largest religion. And lets face it, a few hours in a jet airplane and most Europeans can enjoy the tropical climate of the Middle East region. But there’s more, like the large trade and financial pacts between different Arabic and European nations. Take for instance the in ‘state-of-turmoil’ Libya, who holds large stakes in Italian blue-chip companies like banking giant UniCredit or defence company Finmeccanica. That makes Italy, already a EU member in financial chaos, a first potential victim of the unrest in the Middle East. But if we dig deeper in the EU/Middle East web, then we see more potential trouble ahead. The immense trading hub between Morocco and France, or the Turkish ‘gateway’ for Eastern Europe. No wonder few pundits are sounding the alarm bells. But hey, that’s the world we live in nowadays, with everyday a potential to chaos. If we take a step back, away from the heat, and have a look at the bigger picture for Europe, then the real problem and threat for Europe lies within Europe, namely Spain. Spain is for Europe what Florida is for the US: one gigantic foreclosure mess! And guess what, prices of Spanish homes are still dropping, just like oversees.

The three events to watch this week are the global PMI’s, US payrolls and events in the Middle East. Goldman expects the China February PMI to be largely unchanged from January’s level. Regional factory surveys point to a strong ISM index for February. Nonfarm payrolls in February probably grew at their fastest rate since last April. Consensus is looking for a 190k NFP number, and a 9.1% unemployment rate. The dramatic events in the Middle East over the last few weeks will likely continue to impact global financial markets.

There are many different kinds of revolution; some more effective than others. Telling the difference between a successful revolution and a failed revolution can be tricky. Often, on the surface, they look exactly the same. The secret is to set aside what we would “like” to see, and be brutally honest about what was actually accomplished in the course of the dissenting action. Has power been fully rescinded by the offending government or regime to the people, or, to yet another corrupt bureaucracy with a slightly different face? Have the puppet strings of corporate globalists been severed from your country, or do they remain strong as ever? Has ANY corrupt official actually been punished for the crimes that led to the insurgency in the first place, or, did they fly off scot-free to their million dollar villas in Ecuador, drinking mojitos in wicker recliners and watching the disaster they created unfold on CNN? Who ultimately benefited from the event?

The Numbers Behind the Middle Eastern and North African Revolts

It's only a start ... but the Egyptians have done orders of magnitude more in a couple weeks than the U.S. military has been able to do in 9 years.

The two oil shocks of the 1970s saw gold prices rise by more than 24 fold (2,300%) in just 9 years - from $35/oz to $850/oz see chart above). To put that in perspective, today gold's rise has been far more gradual and it has risen some 5 fold (430%) in 11 years - from $250/oz to $1,330/oz. In this regard it resembles gold’s rise from $35/oz in 1971 to nearly $200/oz in late 1974 – a six fold increase. Given the significant macroeconomic, systemic, monetary and geopolitical risks of today gold is likely to perform again as it did in the 1970s. A 20 fold increase from trough in 1999 to peak sometime in the coming years would see gold rising to over $5000/oz. This may seem outlandish to those unaware of gold's fundamentals but the very small supply of gold internationally, increasing demand (particularly from investors and central banks), the sovereign debt crisis in the EU (soon to spread to the U.S.) and the debasement of the dollar, the euro and other currencies internationally makes this increasingly possible.

And no … allowing democracy in the Middle East will not increase terrorism.

From Foreign Policy Magazine, August 2009: "Lost in this Egyptian Kremlinology is the fact that neither Gamal Mubarak nor Omar Suleiman presents a clear departure from the present state of affairs. Neither offers the new social contract that so many of Egypt's 80 million citizens are demanding in strikes and protests. The prevalence of the Gamal vs. Omar debate, more than anything, highlights the low expectations ordinary Egyptians have for a democratic succession to Hosni Mubarak's 28-year reign. Those low expectations come with their own quiet tyranny, too."