Update, February 22nd, 2012
According to Vitol, the world’s top oil trader, as reported in Reuters, the rise in oil prices to above $120 a barrel has more than compensated Iran for oil export revenues lost due to Western financial pressures. Tuesday, Benchmark crude rose by $2.65, or 2.6 percent, to end the day at $106.25 in New York and Brent crude climbed by $1.61 to close at $121.66 in London. This is the highest rise since last year May.
“The Iranians now want the price as high as possible as they’ve got less volumes to sell. I reckon they are probably quite close to winning based on the numbers,” – Ian Taylor, Viol chief exec.
India Buys Iran’s Oil in Gold Bullion; Dollar Drops; China Considers Same Deal
February 20th, 2012, Updated 21st
NewsRescue-As war drums keep beating, India has began purchasing Iran’s oil with gold and not the US dollar. The move caused a drop in value of the dollar. Meanwhile China too is considering the same deal according to reports from DEBKAfile’s. India and China take about one million barrels per day (bpd), which amounts to 40 percent of Iran’s total exports of 2.5 million bpd and both nations have huge gold reserves.
The Obama administration has ratcheted up most severe sanctions against Iran in punishment for the suspicion of an alleged covert program to build Nuclear weapons. Iran has consistently denied this claim, referring to it as a ‘Zionist’ ploy against the nation.
As nations turn to gold to purchase oil, tensions are expected to rise. United States recently indicated a likelihood of an Israeli attack against Iran this Spring. Spring is expected to be a period with serious unrest in western nations as ‘Occupy’ protests are being planned to restart after the cold low ebb, according to a report in the New York Times. Some see the planned Spring attack as a usual tactic to divert attention from domestic heat. Iran has promised to defend itself ferociously against any military or continued economic attacks.
Meanwhile in a chess-like move, Iran preempted a European oil embargo slotted for mid year, by halting sales of oil to six European countries, including the Netherlands, Spain, Italy, France, Greece and Portugal, months before European nations had planed to setup alternative sources. This move has been predicted to create increased economic hardship in Europe. Greece is already at the point of default, and Portugal, Spain and France are following closely in economic distress. On Tuesday Iran’s foreign Ministry spokesman, Ramin Mehmanparast said that Iran will only continue exporting oil to the European Union if the member states give a guarantee to pay the price and sign medium- and long-term oil purchase contract.
Simit Patel describes economic and investment implications of the move to gold:
Today’s big story that doesn’t seem to be getting enough attention is the revelation that India will begin to buy oil from Iran using gold (GLD) — not dollars. This is a big story with a couple major points:
1. It shows the exodus from the dollar is gaining speed. How far off is the tipping point? I post it’s not as far off as many would believe. With the major economies of the world facing $7.6 trillion in bond payments due this year, I think the tipping point for a shift out of dollars and into a new monetary system backed by gold is not as far off as it may seem.
2. It shows the increasingly harsh economic sanctions the US has placed on Iran, and the geopolitical tensions between the US and Iran in general, have an effect beyond the two countries involved. India is the second largest buyer of Iranian oil, after China; India spends $12 billion USD (over 200 tons of gold) per year on Iranian oil. Because India has some energy dependence on Iran, it is conceivable that India has a greater interest in protecting Iran than in supporting US sanctions. This is the kind of political environment that sets the stage for widespread war, greater trade embargos, rationing of resources, and all the political and economic headaches that come from people fighting and not getting along.
3. India’s decision to purchase its oil with gold, along with central banks continuing to accumulate gold, also shows that gold is finding its way back into the international monetary system. The end game for gold bugs that have been holding to their gold for years is when gold finally gets re-monetized, preferably through a new international monetary agreement. There has been much speculation that the IMF would issue and manage Special Drawing Rights as a new world currency; what gold bugs will want to watch for is signs that SDRs will be backed by gold to some extent, or if nation-states reject the IMF’s authority here and gold becomes the world currency on unofficial, implicit terms.
Related: NewsRescue- Demise of the dollar. Oil producers, consumers in ‘secret’ talks to replace $
The only way gold does not get re-monetized is if some type of agreement between the US Treasury and major Treasury bondholders can be reached in which the debt is partially cancelled and bondholders agree to take the loss. This would also need to be coupled with significant cuts in US federal government spending, so that the budget was balanced and the issuance of additional Treasury bonds were not needed. The odds of this occurring become slimmer with each passing day, and are extraordinarily slim when we consider that this is an election year and presidential candidates outside of Ron Paul are reluctant to commit to significant reductions in government spending that would bring about greater short-term pain.
As for the immediate term, it is increasingly looking like the bottom is on on gold. We have cleared above the 200 daily moving average, and closed last week above the 30 week exponential moving average. The chart below shows the weekly price of gold with the 30 exponential moving average plotted.
These two signs should cause the bears to back off a bit, and their short covering sets the stage for the market go in the opposite direction. Add in the underlying fundamentals and the geopolitical tensions that are exacerbating a run out of the dollar, it becomes clear that gold is still undervalued and has much room to go.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Featured img: NowSquared.com