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Gold has now firmly broken through the $600 level and set to rise much higher.
The Oil Crisis
Perhaps this title is an understatement, because we are facing far more than simply an oil crisis. The difference between the price of Brent Crude and West Texas is disappearing as supplies are rapidly being overtaken by demand.
The capacity cushion in the entire oil industry was at 1.7 million barrels, 1.5 million of which sits with OPEC. We believe this has dropped to perhaps below 1 million barrels per day by now and dropping fast. The questions we have to ask now are:
- The interruption in supplies from the Nigerian Delta region are continuing, that's up to 600,000 barrels down on global supplies. What will happen if supplies from Nigeria, Iran or places like Venezuela are interrupted?
- Chad is threatening to hold back 160,000 barrels a day.
- What if suppliers turn to exclusive contracts with individual nations like China to the detriment of other buyers?
- To what extent will individual nations go to, to secure their own supplies of oil?
- Just how far will the U.S. go to, to ensure continued supplies from the Middle East?
Clearly we are on the brink of a global oil shortage
Iran
A strike against Iran is close to a certainty now. Few doubt this it seems. But we have to ask why? Yes, the nuclear enrichment programme is a focal point, but far more is at stake here. And we are not talking about political factors or nuclear threats. We are talking of the consequences of these actions. We are not here to moralise, to justify or support or oppose any of these actions. We are here to help our Subscribers assess the consequences and their effect on the gold market primarily, through the events that take place in this globe of ours.
One of the immediate consequences is rising levels of tension, as war raises its ugly head. Should there be a strike against Iran's nuclear facilities, Iran is unable to react, effectively, militarily. Their 'revenge' will probably only be seen in its control of its own oil supplies. It has always had the option of diverting all its production to the East, to attempt to keep the oil price rising. But such ploys will lead to three figure oil prices and elevated levels of global tension.
On top of this the possibility of sectarian violence lies ready to persuade the Middle East in its entirety, to expand sectarian violence, causing supply ruptures thereby eliminating any remaining surpluses.
Indian Demand.
The Indian economy itself continues to enjoy growing wealth. A holding back of investment into gold has been because of the price. The enrichment of all Indians will over the longer term, be to the benefit of the gold market. The acquisition of wealth will lead to greater consumer goods being purchased, but gold is the destination of savings and investments away from the visible economy too, so gold will remain a major feature of Indian's lives.
As the wedding season kicked off on the 14th April, we expect the break through the Rs. 27,000 to spur buying, as the realisation that the high prices are here to stay. Yes, there is dishoarding and it is growing. Indian demand has reached 1,000 tonnes a year in the past of which 850 tonnes was imported previously. Imports this year are close to zero and even now wedding purchases of gold are down 30 to 50% so far, but that leaves 50 - 70% of normal gold buying continuing. This could well lead to Indian imports even below 400 tonnes this year if this continues, but this is clearly not slowing the price rise of gold.
Those staying out of the market have and will miss out on these rises unless they change their stance. It appears that small retailers and their clients will adjust their view, so we do expect them to return to the market once they realise that prices are not going to come down.
How can we be so certain? A family Elder in India is cautious in the face of the price rises in the market. Imagine him going home and telling his wife and daughter that because the gold price has risen 20 or 30% he is going to break the age-old tradition of buying gold for the daughter on her wedding day to provide financial security for the couple. He would risk a lynching for sure. No, we expect that after six months of waiting, he will go to the market and buy gold, albeit in smaller volumes. There are signs that this is now happening.
One dealer said the current prices were sustainable. "People now have a little more confidence in high prices," said one dealer in Mumbai. Consumers are used to high prices it seems?
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