Gold, Silver And Oil Jump On Middle East “Powder Keg” Concerns

Today’s AM fix was USD 1,281.75, EUR 947.34 and GBP 755.35 per ounce.          

Friday’s AM fix was USD 1,273.00, EUR 938.17 and GBP 750.06 per ounce.  

Gold climbed $3.10 or 0.24% Friday to $1,276.90/oz. Silver rose $0.14 or 0.72% to $19.70/oz.
Gold and silver were both up on the week at 1.92% and 3.52% respectively.

Middle East ‘Powder Keg’

Concerns over fighting in Iraq and Ukraine saw a global shift into traditional safe haven currencies, precious metals and bonds today as oil rose again and hovered near a nine-month high. European stocks fell.

Worries about Iraq were intensifying after Sunni insurgents seized the mainly ethnic Turkmen city in the northwest of the country over the weekend. It continued to drive fears about widespread turmoil in the country and the region.

Russia said it would cut off gas supplies to Ukraine this morning, setting the stage for a new phase of the months-long conflict between the two nations. The move came after the two sides failed to agree on a price for natural gas, a vital ingredient in Ukraine's energy-intensive manufacturing economy. Ukraine is also a vital link between the rest of Europe and Russia's gas supplies, transporting 15 percent of Europe's gas supplies through its pipelines.

Hopes of Ukraine coming off the boil were dashed after pro-Russian separatists shot down a Ukrainian army transport plane, killing all 49 military personnel on board.

Gold climbed another 0.6% to the highest level in almost three weeks, extending a second weekly increase, as escalating violence in Iraq led to rising oil prices and safe haven demand. Gold rose 1.9%  last week and a fifth day of gains today would be the longest such run since February.

Silver reached a one-month high, while platinum and palladium rose. Silver for immediate delivery climbed over 1% to $19.889 an ounce, the highest level since May 14. Palladium gained 0.9% to $822.09 an ounce, while platinum rose 0.7% to $1,443.25 an ounce.

NYMEX Light Sweet Crude Oil (WTI) - 2014 YTD (Thomson Reuters)

Gold bullion
has advanced 6.7% this year in part because of unrest in Ukraine, where tension escalated last week after pro-Russian militants shot down a transport plane in the east of the country. In Iraq, the army killed more than 279 rebels as fighting intensified in OPEC’s second-biggest producer.

If Iraq's oil supply goes offline, crude prices could reach $150 to $200 a barrel, T. Boone Pickens, founder of BP Capital Management, told CNBC on Friday. "That's where you have to kill demand with price. That's the only way you can do it, because oil won't be there," Pickens said in an interview with "Street Signs."

Gold in U.S. Dollars - YTD 2014 (Thomson Reuters)

Geopolitical risk remains high and does not look like abating any time soon. Indeed, there is now the risk of geopolitical contagion and a serious regional war that could lead to a wider war.

Violence in Iraq exploded as Iraqi separatists,  the Islamic State of Iraq and al-Sham (ISIS), took over the second largest city in Iraq. ISIS forces are just 50 miles from Iraq’s capital, Baghdad.

 Sunni Islamist militants gained more ground in Iraq overnight, moving into two towns in the eastern province of Diyala. U.S. President Barack Obama is considering military strikes to halt their advance towards the capital Baghdad.

To the north, a Kurdish militia known as Peshmerga took over key government installations in strategically important, oil hub of Kirkuk. The situation in Iraq has deteriorated significantly in a very short period of time  and an all-out sectarian conflict is looking more likely as each day goes by.

With Syria's Kurds already exploiting civil war there to run their own affairs, Iraqi Kurdish expansionism is worrying U.S. ally Turkey, which has its own large Kurdish minority and fears a renewed attempt to redraw borders and create a Kurdish state.

Iraqi President Maliki's army already lost control of much of the Euphrates valley west of the capital to ISIS last year, and with the evaporation of the army in the Tigris valley to the north, the government could be left with just Baghdad and areas south - home to the Shi'ite majority in Iraq's 32 million population.

The Wall Street Journal is reported that Iran sent two battalions of Iranian Revolutionary Guards to help the Iraqi government in its battle against ISIS. This is an important development. Iran has already intervened in Syria and has the power to crush ISIS in open combat.

Iran, which it is believed funds and arms Shi'ite groups in Iraq, could be brought deeper into the conflict, as could Turkey to the north. In Mosul, 80 Turks were held hostage by ISIS after Ankara's consulate there was overrun.

NYMEX Light Sweet Crude Oil (WTI) - 20 Years (Thomson Reuters)

Iranian or Turkish intervention would make the conflict inside Iraq much worse. Israel wants to see a continuation of the tough line against Iran which it continues to see as an existential threat.

Gold bullion has increased 6% this year in part as tension between Russia and the U.S. and EU led to some haven demand. Developments in the Middle East are likely to deepen geopolitical tensions between Russia and the West and this should support gold and indeed lead to higher gold prices in the coming months.  

There is still the potential for a wider Middle East conflict as the region remains a ‘powder keg.’ Iraq may be the match that sees the region explode into chaos and war - with attendant effects on global oil prices and the global economy.

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