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Gold Demand Dynamics Change due to Growing Geopolitical Instability

Commodities / Gold & Silver Nov 28, 2008 - 10:13 AM GMT

By: Mark_OByrne

Commodities Gold and silver were flat yesterday and have remained unchanged in Asian and early European trading. Gold is set for a fourth straight week of gains on safe haven demand and on the likelihood of further dollar declines with further reductions in U.S. and international interest rates and further quantitative easing next month.


Euro gold and British pound gold remained firm at €633 and £529 after recent gains. Even gold in Swiss francs (possibly the most defensive currency) remains near record highs of CHF1045 - gold is trading at CHF982 and is up by more than 10% against the Swiss franc in the last 52 weeks. Since the collapse of Bear Stearns and the start of the credit crisis in August 2007, gold has rallied strongly in all the major currencies including the Swiss franc. Gold is up from CHF800 to CHF982 or a healthy 22% in that crucial 15 month period. In the last 4 years, gold has nearly doubled in price in Swiss francs.

Volatility is set to continue in the gold market but it is important to realise that commodity and equity markets have been far more volatile in recent months.

Investors Continue to Ignore Geopolitical Risk

Geopolitical risk has been ignored in recent months as the financial and economic crisis has rightly taken centre stage. But it is important to remember that geopolitical risk remains an ever present threat as seen in the terrorist attacks in India. & Tensions between the two nuclear powers, India and Pakistan,& have risen sharply and India has hit out at Pakistan with the Prime Minister blaming& "neighbours" over the attacks.

To attempt to analyse the gold market while completely continually ignoring geopolitical risk is a serious error. Geopolitically, the world remains beset by many serious risks, any of which could seriously impact western economies. Pakistan, North Korea, Lebanon and Israel are some of the hotspots posing risks in this regard. This was graphically illustrated when Benazir Bhutto was tragically assassinated in Pakistan and gold surged some $25 on safe haven buying due to fears regarding a nuclear bomb falling into the hands of Islamic militants in Pakistan.

The crux of the matter is that the western world, and particularly the US, is massively dependent on oil and gas exports from countries who are at best lukewarm and at worst outright hostile to them. Russia, Venezuela and Iran are some of the more obvious glaring examples of this.

Citigroup Report: Gold Holders "Mellow" for Years; Holders of Other Asset Classes Increasingly "Yellow"

Citigroup's excellent report yesterday (see actual report in Commentary section or at http://www.gold.ie/citigroup_gold_report.pdf) warned of the possibility of geopolitical instability in the coming years including civil unrest and massive political instability internationally and possible wars.

Most historians and economists believe that the Weimar inflation and Great Depression were important factors which led to World War II. The current global economic crisis is likely to create massive political tensions that could deteriorate into military conflict and war.

Citigroup report's authors warn of " ... further economic instability, which could lead to political instability in some nations and possibly even domestic regional unrest or worse. This deteriorating picture would also likely be a catalyst for Gold to perform well with a status of& "safe haven".

Considered opinion is that all the& gold in the& world can fit in a 25 square metre cube so even a relatively modest change in the supply/demand dynamics could result in an outsize move in price. Gold has been used as a monetary instrument as far back as you can look. The same cannot be said about precious art or wine or fine cars etc. In times of extreme concern it is highly likely that it will regain that& "luster".

As a consequence we remain of the view that& gold will continue to perform well and will do particularly well as the consensus grows as to how we will come out of this mess (or not). Compared to just about every other asset class in the last 5 to 7 years holders of& gold likely look mellow ... it is the holders of other assets that are looking a bit 'yellow'."

By Mark O'Byrne, Executive Director

Gold Investments
63 Fitzwilliam Square
Dublin 2
Ireland
Ph +353 1 6325010
Fax  +353 1 6619664
Email info@gold.ie
Web www.gold.ie
Gold and Silver Investments Limited
No. 1 Cornhill
London,
EC3V 3ND
United Kingdom
Ph +44 (0) 207 0604653
Fax +44 (0) 207 8770708
Email info@www.goldassets.co.uk
Web www.goldassets.co.uk

Gold and Silver Investments Ltd. have been awarded the MoneyMate and Investor Magazine Financial Analyst of 2006.

Mission Statement
Gold and Silver Investments Limited hope to inform our clientele of important financial and economic developments and thus help our clientele and prospective clientele understand our rapidly changing global economy and the implications for their livelihoods and wealth.
We focus on the medium and long term global macroeconomic trends and how they pertain to the precious metal markets and our clienteles savings, investments and livelihoods. We emphasise prudence, safety and security as they are of paramount importance in the preservation of wealth.

Financial Regulation: Gold & Silver Investments Limited trading as Gold Investments is regulated by the Financial Regulator as a multi-agency intermediary. Our Financial Regulator Reference Number is 39656. Gold Investments is registered in the Companies Registration Office under Company number 377252 . Registered for VAT under number 6397252A . Codes of Conduct are imposed by the Financial Regulator and can be accessed at www.financialregulator.ie or from the Financial Regulator at PO Box 9138, College Green, Dublin 2, Ireland. Property, Commodities and Precious Metals are not regulated by the Financial Regulator

Disclaimer: The information in this document has been obtained from sources, which we believe to be reliable. We cannot guarantee its accuracy or completeness. It does not constitute a solicitation for the purchase or sale of any investment. Any person acting on the information contained in this document does so at their own risk. Recommendations in this document may not be suitable for all investors. Individual circumstances should be considered before a decision to invest is taken. Investors should note the following: The value of investments may fall or rise against investors' interests. Income levels from investments may fluctuate. Changes in exchange rates may have an adverse effect on the value of, or income from, investments denominated in foreign currencies. Past experience is not necessarily a guide to future performance.

All the opinions expressed herein are solely those of Gold & Silver Investments Limited and not those of the Perth Mint. They do not reflect the views of the Perth Mint and the Perth Mint accepts no legal liability or responsibility for any claims made or opinions expressed herein.

Mark O'Byrne Archive

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