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."
Yet it is not just Iran or Libya. Gold's recent historic rally has been in part a hedge against revolution. Dictators are amassing wealth and putting it in gold, a truly international currency. It is a currency that is hard to determine country of origin or its owner, a currency that can be moved or used to either keep you in power or enjoy your exile.
Oil is another currency that is worth more because of the shakiness of the global situation. While the market may feel better about Libya, there are other worries. Yemen generals are joining the opposition and Bahrain is being accused by human rights organizations for targeting doctors.
And then you have the demand prospects rising again. A huge rebound in the Japanese stock market should get oil traders salivating over the rebuilding phase of the operation in Japan. Obviously after a period of demand destruction, the tragedy in Japan will become very bullish for oil. Not only the hard numbers rebuilding Japan, but a reduction in nuclear power plants around the globe will eventually lead to millions of more barrels of oil consumed on a daily basis as well as coal and natural gas.
Natural gas stocks are soaring as the world more and more will look to gas to make up the difference. Natural gas is the cleanest and most proven alternative out there and its abundance of supply may feed a global economic energy renaissance. Still gas looked a bit oversold here in the US and oil looks like it is consolidating for another run higher.
Gasoline still looks bullish and the switch to summertime blends at the refineries are is underway. Cattle and hogs look very bullish, and high corn prices are causing ranchers to cull the herds as demand is rising in Japan because of concerns over radiated foods. In the meantime, high oil prices will drive even more corn into our gas tanks.
Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at pflynn@pfgbest.com.
