Libyan Unrest Supportive For Gold, Silver

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Libyan Unrest Supportive For Gold, Silver Along With Oil, But Hurts Industrial Metals

22 February 2011, 12:13 p.m.
By Allen Sykora
Of Kitco News

(Kitco News) - Political unrest gripping the Middle East and North Africa has now spread to one of the world’s major oil exporters, and that in turn is having major ramifications for precious and industrial metals.

Gold is within striking distance of its record highs and silver has hit a 31-year peak as investors seek safe havens. However, sharp rises in oil prices have prompted worries about the economy, leaving industrial metals such as copper, aluminum, platinum, palladium and others on the defensive.

In Libya, protesters have been fired upon in recent days by troops loyal to leader Muammar Qaddafi, as the unrest that began in Tunisia and Egypt spread to other Middle East and North African nations. Libya is the first full-blown crisis involving a significant oil producer, however. The country produces some 1.6 million barrels a day and exports in excess of 1 million. Oil and gas firms have evacuated staff and shut down some production.

This, and worries that unrest could engulf still more producers, have sent Brent and U.S. crude oil prices to their highest levels in more than two years. Light crude oil for April delivery has peaked at $98.48 a barrel so far Tuesday on the New York Mercantile Exchange and was still up $4.54, or 5.1%, to $94.25 late in the New York morning.

“It’s all related to the uncertainty about supply,” said Bill O’Neill, one of the principals with LOGIC Advisors.

Against this backdrop, April gold on Nymex’s Comex division was up $17.10 from Friday’s pre-holiday weekend close to $1,405.70 an ounce. It peaked at $1,411.50, which was only $22.60 from the life-of-contract high hit in December. March silver was up 96.4 cents to $33.260 and earlier peaked at $34.33.

“I think it’s likely the gold market would have been higher anyway, but the geopolitical issues are an accelerant,” said Jim Steel, metals analyst with HSBC. “In a time of change, investors will tend to seek safe havens. And gold is principal among those.”

Just how much strength occurs will depend on how much disruption occurs in the Middle East, as well as the impact on the dollar and oil market, Steel said. “But it’s safe to say there is geopolitical premium built into gold, which is likely—at some level—to persist,” he concluded.

There are fears that a political-unrest contagion could potentially spread elsewhere.

“Libya is in the front right now, but we’ve seen how fast this (unrest) has moved across the region,” said Mike Zarembski, senior commodities analyst with optionsXpress. “What if it hits some of the real major producers (such as) Iran, Iraq or Saudi Arabia….If unrest does turn to any of those regions, then we’ll really see some fireworks in the oil markets.”

O’Neill and Zarembski both said the unrest could affect crude, and thus metals, for some time.

“Even if things quiet down, there is going to be an underlying concern things could flare up later on in the year or in the future,” Zarembski said. “So that is going to keep a little risk premium in the oil markets.”

Previously, Egyptian President Hosni Mubarak initially tried to hold onto power as the protests mounted, before later relenting and resigning in the face of heavy opposition. But there are worries that Qaddafi could be more unpredictable and resort to more violence in a bid to maintain control. Already, his troops have fired upon funeral processions.

Meanwhile, as oil prices surge amid the Libyan unrest, industrial metals are falling back. Base metals that trade on the London Metal Exchange are lower. In New York, Comex March copper futures slid 10 cents to $4.3820 a pound. Nymex April platinum was $18.90 lower to $1,824.40 an ounce, while March palladium lost $23.50 to $834.20 an ounce.

“A situation like this (in Libya) could be something of a threat to the economy, both here, in Europe and elsewhere as well,” O’Neill said.

A spike in oil prices has fanned fears of higher inflation, said Robin Bhar, senior metals analyst with Credit Agricole CIB. This in turn has prompted concerns about tightening of monetary policy and slowing global economic growth, which means less demand for industrial metals. Otherwise, Bhar pointed out, U.S. data has shown improvement since mid-January.

Industrial metals are especially vulnerable to pullbacks since speculators and investors previously were significant buyers, Zarembski said. “They could be victims of a risk-off trade where large speculators start to exit positions,” Zarembski said.