Can Middle East Revolutions Affect the Gold Price?

When the Tunisian, then the Egyptian revolutions succeeded we were all surprised. Many believed that at last democracy had won in the Middle East. When the King of Jordan changed his government, a feeling of contagion set in. Then we heard of riots in Yemen, Libya, Bahrain, Iran and we now look at the entire Middle East as ripe for contagious revolutions. The question is: "Are these revolutions or just exuberant demonstrations?" Will they topple regimes and disrupt oil supplies. We will have to wait and see. None of these stories was expected to affect the oil price, let alone gold and silver prices. But almost imperceptibly the taste has changed. Bahrain's revolution (demonstrations?) give an uncomfortable twist to the story. Even the riots in Libya, long disliked in the West, could change the global oil price. But more than this is also possible.

Reflections of History
In the early 1970s when the dollar's link to gold was cut, the oil price took off from $8–$35/barrel before settling back. By that time, the Arab OPEC states were in the process of, or had, nationalized their oil production. They clearly traded their oil pricing (agreeing to continue only in U.S. dollars) against the guarantees of sovereignty by the U.S. Since then, the U.S. has protected Middle Eastern oil producers as far as it's been allowed. Middle Eastern oil is considered a U.S. "vital" interest.

• When the Shah of Persia was ousted by the religious revolutionaries, it came as a shock to the world and in particular the U.S. because this was a force they could not fight – a 'religious democracy'. In terms of the present crisis, it is a key to understanding that the Sunnis side of Islam sees government dominating religion and under the Shiites it is religion that dominates government, as we have seen in Iran since then.


• The imposition of democracy in Iraq of late, has resulted in the majority Shiites taking power leaving the (30%) minority Sunni side of Islam the underdogs. Yes, it is true that they were so under the Shiite Saddam Hussein, but his regime was secular—not religious. Unfortunately, as Iraq's neighbor and a fully Shiite nation, Iran now holds sway over Iraq as the U.S. withdraws, having established[?] democracy there.


• Saudi Arabia is 85% Sunni, but in the oil-producing region in the east of the country, the population comprises 75% Shiites who have made it clear they want to be treated better.


• Across from Saudi Arabia and a 16-mile causeway lies Bahrain, where the split is similar to Iraq, with 70% Shiites governed by a 30% Sunni minority topped by a monarchy.

The Stakes Are Higher!
This is where the stakes change dramatically. Bahrain is the focal point of the U.S. military presence in the Persian Gulf, across the Gulf from Iran. A line drawn across the Gulf straddles the shipping lines that carry the oil from the Gulf. If democratic principles dominated that country, the Shiites would become the government and likely abolish the monarchy. Bahrain is an oil producer and would, under a Shiite government be in a position to support the Shiites in the oil-producing region of Saudi Arabia. The fear now is that such a shift to a religious democracy would extend the attitude of Iran to the Bahrain. And yet that is what democratic principles would favor. There would be a huge conflict of interests for the U.S. in Bahrain. If any of this oil came under the government of the Shiites, world oil prices would shoot up to record levels in quick time. This then would demonstrate just how vulnerable the world would be to the will of the Shiite Muslims.

None of this has happened yet and many would say it will not happen at all. The fact that it is a danger may produce remarkable twists to this story in the days ahead. The situation has the potential to rock the global economy—including China's—through unacceptably high oil prices. Uncertainty is now growing over this possible chain of events and may produce very diverse ripples.

• Oil prices, for instance, sitting over $100–$145/bbl will kill the developed world's growth and plunge it back into recession or worse.


• As with Iran, we could expect Shiite-ruled countries to treat the U.S. as enemy number one and price their oil and national reserves in currencies other than the U.S. dollar. They would develop China as their main customer. This would hurt the dollar, as the globe's sole reserve currency, badly and add impetus to the shift in the global balance of power.


• We can expect the U.S. will do what it can to protect its vital interest there as we saw in both Desert Storm and Iraq; but how could it 'sell' that to its own nation already tired of war in Iraq and Afghanistan?

It is very difficult to see what will happen next. Most of the developed world will be hoping the demonstrations in Bahrain will remain just that. Perhaps large peace offerings to remove the prejudicial situation facing the Shiites will come next? But the last few years have seen so much structural decay in the monetary world—in the shift of wealth from West to East, banking and the sovereign debt situation—that the future is increasingly difficult to forecast. What is clear is that the 'ripples' from this and other crises will spread far and wide, throughout the global economy and global politics. Will religion be allowed to have such an impact on the world? Perhaps that could be the next new set of confrontations?

How Will All This Affect the Gold and Silver Markets?
Don't be surprised to see major speculation in the oil market in expectation of the worst. In the past, the gold, followed by the silver, price has only been influenced by the oil price indirectly. The uncertainty the oil situation posed to the global economy had a direct impact on the two precious metals. The recession and credit crunch followed, pulling all markets down and causing a +20% correction in gold and silver prices. This time, we would expect to see far less reaction in PMs should the worst happen. After all, PM markets have continued their uptrend despite these crises. In fact, these crises have prompted more accumulation of precious metals while other markets have stalled. This time, investors have already tasted the bad times, so they won't react as precipitously as they did then. We feel they will turn from other markets to precious metals quickly. After all, the potential of these situations points to extreme times wherein precious metals come into their own.

What Can We Expect from Gold and Silver Prices in 2011?
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