It is with deep thoughtfulness that I consider the subject of today's blog. How will an emerging conflict in the Middle East affect the price of Gold
and how close are we to the escalation of such an event? I say "escalation" because, clearly, conflict in the Middle East has seriously stepped out of the "usual" since 2012. During that year I stood metres from the Israeli border with Lebanon exploring beautiful coastal caves, visited a cattle ranch (with an excellent steak restaurant!) just metres from the Syrian border, then enjoyed a snorkel dive from a boat in Eilat, a mile off Egyptian and Jordanian waters. Now, however, I would not consider venturing so close to any of those borders, due to the massive infiltration by ISIS in the region, plus the ongoing Syrian civil war. And now both of these developments are dragging the U.S., China and Russia into a state of war with each other of their own volition.
Now, this week, violence is breaking out within Israel itself. This subject is notoriously difficult to gauge, or sometimes even notice, outside of the Middle East media. The BBC, Guardian and Independent are particularly amiss in their lack of historical and local perspective. I have friends and many contacts in the area and regularly hear news that just doesn't make it into our Western media, which is, in sections, affected by a clumsy European perspective in attempting to understand the complex history of the world's most volatile region.
But people on the ground are often very savy to what is brewing. I was last there in May and we could feel the tension even then. As you may have picked up, there has been a very tense increase in violence these last few weeks in Israel, with innocent bystanders being attacked in knife, bus and car attacks. This would not normally correlate to affect the global Gold price, except this time, Russia is on the northern border with Iran, Iraq and China, while Jordan gears up on its western border with Israel. But how does a democratic nation protect its citizens without being dragged into a regional war? This brutality puts the Sydney Coffee House Siege and the Charlie Hebdo Attack on par, except that this has been going on every day for two weeks. I wouldn't personally recommend watching the CCTV released of one of yesterday's attacks, on an elderly gentleman at a bus stop, unless you have a strong constitution. A major hospital in Jerusalem, which I visited for a friend's father in 2012, has received victims from terror attacks every day
for the last two weeks and there is no sign of this stopping. Just because this doesn't make it into the headlines here, doesn't mean these events aren't drastically increasing the instability in an area. Only last week I highlighted Russia and China's increased involvement in Syria, and since then it has been announced that Chinese warships
on are their way to support Russia in this worrying escalation. When regional conflict becomes international, that is when we look to the Gold price. And there is one more reason why this escalation of violence in Israel is particularly pivotal this week, which I will explore a little later in this piece.
So, this week, it would be prudent to look at how conflict in the Middle East historically affects the price of Gold and Silver.
Currently Gold - and especially Silver - are moving higher, as these worldwide geo-political tensions continue to put pressure on safe haven buying quietly behind the scenes:
"It is particularly noteworthy that silver has broken above its August high. You will recall that silver made a new low price in August, but gold held steady. That created a bullish divergence, and both metals responded with brisk rallies. Silver is up a remarkable 12.6% since then, far outpacing gold, which nevertheless has risen a very respectable 6.5% from its closing low price in August. Of course both of these are significant rallies, and it looks like there is more upside in the weeks ahead for gold and silver. The strength in recent weeks is an important signal. It therefore looks like both gold and silver will rally into the end of the year and probably into the first quarter of next year as well." (James Turk, 12 October 2015
So, in this context, let's look briefly at the history of the Gold and Silver price when war breaks out in the Middle East against Israel specifically:
"For instance, on October 6, 1973, Egypt and Syria, with the support of other Arab nations and the Soviet Union, launched a full-scale assault on Israel. This conflict, known as the Yom Kippur War, was over by 24 October, but it changed the gold market forever. At the outbreak of the war, the London PM gold fix was $98 per ounce. By the time the Arabs lifted their oil embargo in March 1974, gold had soared to $173 per ounce. A year after the start of the Yom Kippur War, gold was still at $167 per ounce, 70% higher than it was before the war." (Blanchard Economic Research
It is worth noting that the U.S. Congress actually rationed petrol to its own citizens during this period because OPEC nations in the Middle East drastically raised the price of oil. This in turn was an OPEC reaction to Nixon dropping the Gold standard and to punish America's support of Israel during the Yom Kippur War. For a short video explaining the correlation between previous oil embargoes from the Middle East, Oil and Gold we recommend this short 5 minute video Conflict in the Middle East: OPEC's 1970s Oil Embargo & Its Impact
This video, interestingly, also
cites the Syrian and Egyptian attack on Israel as the tipping point in the rising Gold price, much like Blanchard.
What makes this historical view especially pertinent to this week's news regarding Israel is two-fold:
First, the current uprising is being heavily influenced by Jordanian influence. This is not good news and suggests a more wide reaching regional conflict to come. Relations between Israel and Jordan had been relatively peaceful, and represented Israel's quietest border. But that is changing. ISIS are already present in Jordan and now are influencing the violence in Israel itself. If the last vestige of a peaceful neighbour is evaporating, it feels as if the entire region is being pulled into war.
Secondly, as we have seen above, there is a large correlation between the price of Gold as a safe haven and the oil wars usually behind the geo-political headlines. And what was discovered in Israel this last week? Massive oil reserves! After decades of Israel being surrounded by oil rich nations, "it appears there’s a big-time turnaround with the announcement Wednesday that massive oil reserves have been located in the Golan Heights, close to the country’s border with Syria. Afek Oil and Gas, an Israeli subsidiary of the U.S. company Genie Energy, confirmed the find in an interview. "We are talking about a strata which is 350 meters thick and what is important is the thickness and the porosity,” the company’s chief geologist, Yuval Bartov, explained. “On average in the world, strata are 20-30 meters thick, so this is ten times as large as that, so we are talking about significant quantities. The important thing is to know the oil is in the rock and that's what we now know.” According to a September 2014 Times of Israel report on the Golan exploration, Genie Energy is chaired by Howard Jonas and counts among its more notable investors the “former US Vice President Dick Cheney, Michael Steinhardt, Jacob Rothschild, and Rupert Murdoch.” ("Potentially Game Changing Oil Reserves discovered in Israel, Fox News, 8th October 2015)
This last point is significant, as it copies the tensions in the build up to the 1970's oil embargo, which in turn saw the price of Gold (and Silver) enter a two decade bull market. OPEC inflated the price of oil in response to American co-operation with Israel. Once again, American investors are co-operating with Israel but this time in the very bargaining chip on which the OPEC nations think they have the monopoly - Oil - or as it is known "black gold." At the same time, we have a clear coalition between Russian, Syria, Iran, Iraq and China to the north, just a few miles from where this massive new oil reserve was discovered. That all doesn't bode well for peace in the region.
"The other key consideration in the development of the potential oil feed is its close proximity to the vicious fighting taking place just over the border in neighboring Syria, where ISIS and other jihadi organizations had been battling the Syrian forces of President Assad and his Iran-backed allies Lebanon-based Hezbollah even before Russia’ recent entry into the regional conflict. Most recent rocket strikes into Israel’s Golan territory have generally been declared stray fire by the Israel Defense Forces, but regional experts point out that the potential costs and challenges of protecting future oil fields so close to the war zone, as well as the large target it would provide for enemy fire, could prove challenging should the project indeed come to fruition and provide the Jewish state –where a reported 270,000 barrels of oil are consumed daily - with its own source of ‘black gold’."
Add to this dangerous cacophony of political interests the fact that the oil price has been suppressed for months by the U.S. in a low rumbling currency war between the States and Russia, crippling Russia's economy as its main export. A war in the Middle East, with accompanying embargo from OPEC states, would push prices higher, punishing the U.S. at the same time as putting Israel's newly found oil reserves under threat from violent acquisition. What did ISIS do in their take over of land in Iraq? They followed the route of the largest oil refineries and attempted to control them first. (Business Insider UK)
Drawing these strings of Gold, Oil and the Middle East together with the Blanchard report therefore, what makes this report particularly interesting is that it was written in 2000! So let's take a quite factual look at what happened to the Gold price since then:
If only Gordan Brown had known...
The general principles in this report on "Gold and Silver Safe Haven Buying" therefore bear up under historical fact. The author of this report above goes on to clearly reiterate the reason behind this dramatic price rise: "The purpose and value of gold is to provide an investor's portfolio with an insurance policy against negative market events. Historically, gold has served as a safe haven during periods of political and economic crisis. Should the world turn out to be a more hostile place over the next 10 years, no category of paper investments will fully insulate your portfolio. Gold is an asset that could provide true security in such a scenario. Gold has been referred to as the crisis commodity because it tends to appreciate in value in response to negative economic, monetary, or political conditions. Throughout history, tensions and crises around the world have disrupted international commerce, distorted economic conditions, and threatened vital U.S. interests. Today, however, few investors realize that world tensions still pose a serious threat to the financial markets. During these periods of international crisis, Gold and Silver are most often the best form of financial insurance to protect a portfolio. Gold tends to outperform other investments during periods of world tensions. The very same factors that cause other investments to suffer cause the price of gold to rise. Today there are enough reasons for investors to be concerned about the potential effects of world events on their investment portfolios and gold is uniquely suited to provide a safe haven in the event of such a crisis." (Middle East Tensions, Oil, Gold And You The Investor)
Gold and Silver as a Safe Haven: In conclusion, I particularly like this explanation of the difference between paper and physical gold (and silver): "What has been happening of late is significant. Basically, the tail has begun wagging the dog, Eric. The huge volume of paper gold is the dog’s body, while the much lower trading volume of the physical market is the tail. For years now, the central planners have managed to control the tail by using paper gold, driving the gold price to a level at which it has become exceptionally undervalued. But this gaming of the gold price can only continue for so long, at which point it must stop. A good example that illustrates it must stop is the central bank cartel called the London Gold Pool. It operated in the 1960s in an attempt to control the gold price at $35 per ounce. But in March 1968 the cartel crashed and burned. The reason that happened is that the tail always wags the dog eventually. This result is simply a reflection of the fundamentally different nature of paper gold and physical gold. Anything paper is simply that – a financial asset, a promise made by whoever is issuing the paper. There is always counterparty risk when you hold paper instead of the real thing. Physical gold is the real thing. It is a tangible asset, and its value does not depend on someone’s promise. Rather, its value derives from the choice of buyers who want to avoid counterparty risk." (James Turk, 12 October 2015)
So, as more and more signals to global unrest increase, the more wisdom there is in owning your own Physical Gold and Silver. We've had a busy few weeks, with many of our clients returning to buy more. They too can sense an increase in the signs, leading to the need to hold safe haven metals. Please see our CEO's note on delays in certain products due to increased demand for Physical.
As always, do pick up the phone if you have any questions and we look forward to helping you take your first steps into holding your own Physical Gold and Silver in the near future. Call one of the team now on 01769 618618.