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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Gold Prices Set to Double or Triple on Oil Shock

Commodities / Gold & Silver Jul 01, 2008 - 08:57 AM GMT

By: Adrian_Ash

Commodities GOLD PRICES ticked back towards yesterday's 11-week highs early Tuesday, standing 1.1% above Monday's low as crude oil bounced on the threat of Israel bombing Iran .

The Euro spiked above $1.5800 against the Dollar on the currency markets, as traders watched for Thursday's much-anticipated European Central Bank decision on interest rates.


Base metals and soft commodities all pulled back, meantime. The DJ index of European banks dropped to a five-year low after losing 16% of its value in June.

Shares in UBS, the Swiss-based wealth management giant, today fell to an all-time low as it moved to replace four board directors amid a series of US lawsuits and rumors of another $7 billion in write-downs.

UBS has already written off $37.4bn during the global credit crisis so far.

"The sentiment for Gold is bullish," said Bernard Sin at MKS Finance, the finance arm of the Swiss refining group, to Bloomberg by phone from Geneva today.

"Tensions in the Middle East are supportive," he added, after ABC News quoted an anonymous Pentagon official saying that Israel will attack key sites in Iran if Tehran secures enough nuclear material to produce a weapon.

Oil prices bounced more than 2% on the report, buoyed also by British-oil giant BP saying political pressure in Russia may dent its output.

The International Energy Agency (IEA) said today that growth in Russian oil production has hit "an abrupt slowdown" thanks to Moscow 's "unattractive tax structure."

Outside of the Opec oil cartel, the IEA now forecasts a near-3% drop in supplies by 2013. By then, it believes, spare capacity amongst Opec members will have fallen to "negligible" levels.

"With oil prices hitting $140 per barrel we are clearly in the third oil shock," said IEA chief Nobuo Tanaka in Madrid today.

"Truck drivers are going on strike. Airlines are closing down."

The developed world's energy dependence on crude oil has fallen in half since the second oil shock in 1980, says Daiwa Bank. But with prices more than doubling in the last 12 months, the IEA now forecasts a 3% drop in world oil demand every year to 2012.

The IEA claimed in 2001 that oil-importing nations were "well prepared for a new oil shock."

"The combination of higher oil prices, greater inflation fears and a more hawkish European Central Bank will delay the fall in Gold we expect," says John Reade, head of precious metals analysis at UBS in London .

Today he raised his Gold Price forecasts – revised lower only three weeks ago – back to $800 per ounce for 2009, up from $750 previously.

In the busy Gold Markets of India , meantime, "the sharp fall in equity markets across the globe and the weakening Dollar against other currencies pushed up Gold Prices ," said one Mumbai jeweler to Reuters earlier.

"However, the real demand has softened to a large extent," he went on.

Today local Gold Prices broke 13,000 Rupees per 10 grams – a near three-month high – as the Indian currency sank yet again on the forex markets.

Indian inflation has now surged to a 13-year high above 11% per annum. But with the price of Gold jumping worldwide, the Bombay Bullion Association says gold imports into India – the world's hungriest jewelry market – fell 52% in May compared with the same month last year.

Indian gold jewelry demand peaked at 775 tonnes in the year 2000, according to Virtual Metals data. But the decline has been punctuated by strong buying – most often around the post-harvest festival of Diwali in October – as Indian consumers accepted new, higher prices and demand returned.

"Ultimately, Gold is a small market with motivated Indian/Asian and petrodollar-fuelled buyers," say John Hill and Graham Wark in a new precious metals report for Citigroup.

"We see wealth creation in Asia and petrodollar flows in the Mid-East as secular drivers amid a supply-constrained Gold Market . Expect gold to regain $1000 an ounce by the end of 2008, and to work higher through 2009/10.

"Longer term, we believe Gold is capable of doubling or tripling from these current levels."

By Adrian Ash
BullionVault.com

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2008

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Adrian Ash Archive

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