POLITICAL ECONOMY

As Libya moves towards civil war, silver and gold move higher and higher

PDAC drawing record attendance in Toronto as unrest in the Middle East and Africa is benefitting gold and, in particular, silver, but base metals seeing some nervousness.

TORONTO - 

It seems that any talk of a peace deal in Libya was, to say the least, premature and fighting appears to be escalating.  If matters continue the way they are it seems likely that Libyan oil supplies will be cut off completely, and some oil installations, damaged or destroyed in the fighting, may end up being offline for some time.  So far, although the oil price has indeed risen, the Saudi Arabian promise to turn on the taps and meet any shortfalls, has mitigated this.  But, even with this promise there has to be enough nervousness about possible further Middle Eastern and North African unrest to keep the pot boiling for now.  Even the slightest hint of any spread towards some of the other main oil producing states could yet have dramatic effects on the oil price, with a corresponding knock-on effect on global economies, already facing some strong inflationary pointers.

We are already seeing a veritable gold rush in China with sales rising to almost unthinkable levels during the first two months of the year and the raison d'etre is said to be the serious inflationary fears resultant, so the Chinese believe, on the exported inflationary effects of the U.S. Quantitative Easing programmes - and this was in place before the world's major oil producing region started looking insecure.  The knock-on additional inflationary stimulus as higher oil prices trickle through to the worlds' most populous nation could well lead to another twist in the upwards spiral and further impact gold offtake by the general public.

The initial results of the ongoing strife have already been seen.  People breathed a sigh of relief on just the talk of some kind of brokered peace deal in Libya and the safe-haven monetary metals of gold and silver fell back from their peaks. But as soon as realisation loomed that little had changed on the ground and, instead, things seemed to be escalating, the precious metals moved back up again. At the time of writing gold had moved above $1440 and silver had been making even more impressive rises to yet another 30 year high of over $36.50, although both have come back from their peaks as the U.S. market opened.

In the U.S., consumers woke up this morning to sharply higher gasoline prices which are heading towards $4 a gallon and it is now becoming apparent to the U.S. populace that the Middle East/North African unrest is not just some insignificant event on the other side of the world, but one that is already having an adverse impact on the world's biggest domestic economy.

Of course every cloud has a silver lining somewhere and at this year's PDAC convention in Toronto, where organisers are expecting new record attendance of 30,000 explorationists, miners, promoters and investment professionals  - the gold and silver explorers, developers and producers are smiling as their stock prices move up with the precious metals prices.  Indeed high commodity prices across the board are making this perhaps the most upbeat PDAC ever.  But there has to be a word of caution here as the potential adverse impact of sky-high oil prices on the global economy could bring any base metals price surge to a grinding halt and move the Western world backwards into the dreaded double dip recession.  With inflation having a significant impact in China too, everything is not perhaps quite so rosy there either.  Gold and silver may thus remain the best bets, while previously high flying copper could see some nervousness ahead - it has certainly seen a sharp dip so far today!