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Those of us whose memories go back to 1980 have seen it all before. In that year Soviet intervention in Afghanistan, following a build up in Yemen, and the impact of the Iranian revolution doubled the price of oil in very short order. Inflation in most countries at the time was already running in double figures and as a result gold rose to a record level of US$850/oz. If that was translated into today's money it would be equal to US$2,370/oz according to Adam Hamilton of Zeal Intelligence, who uses the Consumer Price Index to recast historical gold prices into today's inflated dollars.
Minews is too old a hand in the gold business to affix his name to a forecast for the gold price, but it is hardly going to fall in current circumstances and the teenage scribblers at the Financial Times who forecast that gold had had its day just after Christmas are chewing their lips as they learn a big lesson.
"When times are difficult catastrophe theorists love gold," said Mark Weisbrot, co-director of the Centre for Economic Policy and Research, in Washington. "Gold has its own dynamic that's separate from all the other commodities."
After what the world had undergone in the last 30 years there are an awful lot more catastrophe theorists about. In the past most general portfolios had a modest exposure to gold, or gold producers and explorers, as a hedge against currency problems and inflation. Then came the clever fund managers and economists who poo-pooed such strategies until they discovered in 2007 that they were not so clever after all. Messrs Brown and Balls were the apotheoses of this cleverness when they sold most of the UK gold reserves between 1999 and 2002, since when the price of bullion has risen from US$275 to US$1,400/oz.
Now we look at North Africa and the Middle East, sources of a major part of the world's oil, and what do we see. Working from West to East, we have Colonel Gaddafi launching gun ships on his own people who are rioting in several cities and Libya alone produces around 2 per cent of the world's crude oil. Work back along the coast and the latest news from Algeria is that there have been pro-democracy demonstrations, despite a state of emergency being in place since 1992, with posters everywhere reminding President Bouteflika what happened to the President of Egypt.
The unrest has spread like the 'flu bug from North Africa to the Middle East. Bahrain and Iran are the most recent additions and they deliver the most potent threats to Western oil supplies. In all this shambles America has displayed its ignorance of the specific problems in each country and shown it is not an ally to be trusted. President Mubarak had been a friend to both the US and Israel, but got no backing at critical moment, so it will be interesting to see how it plays its hand in Bahrain where the Royal Family is employing mercenaries to shoot down protesters. Bahrain, though tiny in size and oil production, is an island in one of the world's most vital shipping lanes and home to the United States' Fifth Fleet.
It is close to Iran and attached to Saudi Arabia by a causeway. The Royal Family are Sunni Muslims, the people are mostly Shias. In Iran the majority are Shias and in Saudi Arabia Sunnis. It's a right mix up, but religion is not key to the general unrest, it is the new generation which disputes the legitimacy of despots and governments who have
outlasted their time. They will not disappear in the face of governmental brutality and are prepared for sacrifice and martyrdom if necessary.
As Iranian warships are reportedly trying to pass through Egypt's Suez Canal, investor behavior reflects a general sense of foreboding. The price of oil is volatile and topped US$100/barrel last week while gold is climbing once again. It has taken people time to appreciate just how serious the problems in the Middle East are becoming, but they realize now that that the situation will take months, if not years, to be sorted. In such circumstances gold is the natural hedge and demand from all over the world will be outstripping supply with an inevitable impact on price.