Gold Softens as Oil Corrects

by Peter A. Grant

March 08, a.m.
(from USAGOLD.com) --

Gold continues to follow the lead of the oil market. Despite escalating attacks in Libya and renewed unrest in Yemen, crude has come under pressure today on reports that other OPEC members are joining Saudi Arabia to increase supply. Platts reported today that Saudi Arabia has started moving oil to the Red Sea for extra shipments to Europe to cover the Libyan shortfall. Even as Saudi Arabia looks to check the rise in oil prices from the supply side, they continue to worry about contagion of the regional political unrest. Saudi Arabia reaffirmed today that it will not allow any demonstrations and ordered security forces to clamp down on any dissent. Nonetheless, there is an ongoing concern that web based calls for a "day of rage" will bring the anti-government protests that have swept across the Middle East and North Africa to Saudi Arabia.

While NATO is apparently still looking into establishing a no-fly zone in Libya, Ivo Daalder the US Ambassador to the organization expressed concerns about the effectiveness of such an endeavor. Daadler told reporters yesterday that "the kinds of capabilities that are being used to attack the rebel forces and, indeed, the population will be largely unaffected by a no-fly zone."

As eurozone leaders prepare the meet once again to discuss the EU bailout mechanism, Portuguese and Greek yields have surged to new record highs. Higher rates in Portugal will heighten pressure on the member state to tap the existing EFSF and accept a bailout like Greece and Ireland before it. However, Portuguese Prime Minister Jose Socrates expressed concern today that in accepting a bailout, his country "would lose its prestige and dignity of being able to present itself to the world as a country that succeeds in solving its problems." The alternative of course is that Portugal goes broke and must restructure (i.e. default on) its obligations. That doesn't do much for Portugal's prestige and dignity either.

Undoubtedly the Portuguese PM is well aware that despite last year's EU/IMF bailout, Greek yields are at new highs as well, following yet another downgrade of its sovereign debt. Of course Greece and Ireland claimed they didn't need a bailout too...right up to the point that they got bailed out. Perhaps Mr. Socrates is simply following the script, or perhaps he realizes that bailouts without debt restructuring -- and the haircuts that go along with that -- have little chance of success. With opposition to further bailouts growing in core-Europe, optimism that an accord will be reached regarding a permanent bailout facility is waning.

The resurrection of the European sovereign debt crisis has forced the single currency off its recent 4-month highs, lifting the dollar in the process. However, the upside in the greenback is likely to prove limited as we here in the US are saddled with our own massive fiscal problems. Yesterday the CBO announced the the budget deficit for the month of February was a whopping $223 bln, the largest monthly deficit ever recorded, and February only has 28-day! Meanwhile, as a government shutdown and a necessary hike to the debt ceiling looms, Congress continues to squabble over spending cuts that amount to a small fraction of what we borrowed and spent in February alone.

Peter Grant is USAGOLD's resident economist and a well-known analyst globally in the forex and precious metals markets.

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