Gold Prices & the Middle East Revolutions

Middle East unrest and popular revolution has yet to affect the Gold Price...

THE SUCCESS of the Tunisian and then Egyptian revolutions surprised us all, writes Julian Phillips at the GoldForecaster.

Many believed that at last democracy had won in the Middle East. And when the King of Jordan then changed his government, a feeling of the dominos falling set in. Hearing of protest and riots in Yemen, Libya, Bahrain and Iran, we now look at the entire Middle East as ripe for contagious revolutions.

The question hangs in the air, "Are these revolutions or just exuberant demonstrations?" Will they topple regimes and disrupt oil supplies? We will have to wait and see. None of these stories was expected to affect the oil price let alone the gold and Silver Price just yet. But almost imperceptibly the atmosphere has changed.

Bahrain's revolution gives an uncomfortable twist to the story. Even the riots in Libya, long disliked in the West, could change the global picture of the oil price. But more than this is also possible.

In the early seventies, when the Dollar's link to Gold Bullion was cut, the oil price took off from $8 a barrel to $35 a barrel before settling back. By that time the Arab Opec oil-cartel states were in the process of or had nationalized their oil production. They clearly traded their oil pricing against the guarantees of sovereignty by the United States, agreeing to continue only in US Dollar. Since then the US has protected the Middle Eastern oil producers as far as they have been allowed to. Middle Eastern oil is considered a US' "vital" interest.

When the Shah of Persia was ousted by religious revolutionaries, it came as a shock to the world and in particular the US because this was a force they could not fight – a 'religious democracy'. In terms of the present crisis it is a key to understanding that the Sunnis side of Islam sees government dominating religion and under the Shi'ites it is religion that dominates government, as we have seen in Iran since then.

The imposition of democracy in Iraq of late, has resulted in the majority Shi'ites taking power leaving the minority Sunni side of Islam (30%) the underdogs. Yes, it is true that they were so under the Shi'ite Saddam Hussein, but his regime was secular, not religious. Unfortunately, as the neighbor of Iraq and a fully Shi'ite nation, Iran now holds sway over Iraq, as the US withdraws, having established democracy there.

Saudi Arabia is 85% Sunni, but in the oil producing region in the east of the country, the population comprises 75% Shi'ites, who have made it clear they want to be treated better. And across from Saudi Arabia over a 16-mile causeway lies Bahrain, where the split is similar to Iraq, with 70% Shi'ites, governed by a 30% Sunni minority topped by a monarchy.

This is where the stakes change dramatically. Bahrain is the focal point of the US military presence in the Persian Gulf. Bahrain is across the Gulf from Iran. A line drawn across the Gulf straddles the shipping lines that carry the oil from the Gulf. If democratic principles dominated that country, the Shi'ites would become the government and likely abolish the monarchy. Bahrain is an oil producer and would, under a Shi'ite government be in a position to support the Shi'ites in the oil producing region of Saudi Arabia.

The fear now is that such a shift to a religious democracy would extend the attitude of Iran to the Bahrain. And yet that is what democratic principles would favor. There would be a huge conflict of interests for the US in Bahrain. If any of this oil came under the government of the Shi'ites world oil prices would shoot up to record levels in quick time. This would then demonstrate just how vulnerable the world would be to the will of the Shi'ite Muslims.

None of this has happened yet and many would say it will not happen at all. The fact that it is a danger may produce remarkable twists to this story in the days ahead. The situation has the potential to rock the global economy, including China's, through unacceptably high oil prices. The uncertainty that is now growing over this possible chain of events may produce very diverse ripples.

For instance. oil prices sitting over $100 to $145 will kill the developed world's growth and plunge it back into recession or worse.  As with Iran, we could expect Shi'ite-ruled countries to treat the US as enemy number one and price their oil and national reserves in currencies other than the US Dollar. They would develop China as their main customer. This would hurt the Dollar as the globe's sole reserve currency badly. This would add impetus to the shift in the global balance of power.

We can expect that the United States will do what it can to protect its vital interest there as we saw both in Desert Storm and in Iraq, but how could they 'sell' that to their own nation already tired of war in Iraq and Afghanistan.

It is very difficult to see what will happen next. Most of the developed world will be hoping that the demonstrations in Bahrain will stay at just that. Perhaps large peace offerings to remove prejudicial situation facing the Shi'ites will come next? But the last few years have seen so much structural decay in the monetary world, in the shift of wealth from West to East and in the banking and sovereign debt situation that the future is increasingly difficult to forecast. What is clear is that the 'ripples' from this and other crises will spread far and wide, throughout the global economy and global politics. Will religion be allowed to have such an impact on the world? Perhaps that could be the next new set of confrontations?

How will all this affect the gold and silver markets? Do not be surprised to see major levels of speculation rise in the oil market in expectation of the worst. But to date, the gold and Silver Price has only been indirectly influenced by movements in energy costs.

Look back to 2008, however, and the uncertainty that the oil situation then posed to the global economy – priced up at $150 per barrel – had a direct impact on the two precious metals. The recession and credit-crunch followed, pulling all markets down and causing a 20% correction in gold and much worse in Silver Prices. But this time, we would expect to see far less of a reaction in the precious metals should the worst happen. After all, the precious metal markets have continued their uptrend, despite these crises. In fact it is these crises that have prompted more accumulation of the precious metals while other markets have stalled.

This time investors have tasted the bad times before, so will not react as precipitously as they did then. We feel they will turn to precious metals quickly, from other markets. After all, the potential of these situations points to extreme times in which precious metals come into their own.

In view of these developments, what can we expect from the gold and Silver Prices in 2011?

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