Oil and gold rally, moving beyond fear

Beyond The Fear

Oil prices rallied and many markets moved in what some have called a "fear premium." The truth is that it's really the move beyond fear. Libyan oil is in doubt and may be off the market completely at some point. The VIX index came down as gold and silver rallied in part because the market expects that more Middle Eastern and North African dictators might think it wise to buy as much as they can before they face the same problems as Moammar Gaddafi.

The Financial Times was all over this story reporting that Iran (another country with civil discontent to say the least) has loaded up on huge amounts of gold to reduce its exposure to the US dollar. The reason in part is to keep its assets safe ahead of what could be an American seizure of those same assets.

The FT says that, "Andrew Bailey, head of banking at the Bank of England, told an American official that the central bank had observed significant moves by Iran to purchase gold, according to a US diplomatic cable obtained by WikiLeaks and seen by the Financial Times" also saying that Iran has been one of the biggest buyers of gold the last decade followed by China and Russia.

That strategy has served Moammar Gadhafi well as his gold assets may be the reason he is still in power. The Financial Times reports that Libyan gold reserves are among the top 25 in the world, are worth more than $6.5 billion dollars at current prices which they say is enough to pay a small army of mercenaries for months or even years.

The FT says that, "While many central banks hold their gold reserves in international vaults in London, New York or Switzerland, Libya's bullion is in the country, said people familiar with the country's activities in the gold market. U.S. and European governments have frozen billions of dollars in Libyan assets, as sanctions have hit the central bank, sovereign wealth fund and state oil company. But Libya's gold reserves may provide Col Gaddafi with a lifeline - if he can sell them. To raise large amounts of money, bankers said, Col Gaddafi would have to transport the bullion out of Libya. Before violence broke out the gold was stored at the central bank in Tripoli. But since then it may have been moved to another location, such as the southern city of Sebha - within reach of the borders with Chad and Niger."

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