Gold Extends on Hints of Contagion to Saudi Arabia

by Peter A. Grant

March 01, a.m.
(from USAGOLD.com) --

Gold has pushed to new 8-week highs and silver jumped to new 30-year highs as violent clashes between pro and anti Gaddafi forces continue in Libya. Additionally, there are rising concerns today that the political unrest that has spread across the region is on the verge of infecting Saudi Arabia, the largest economy in the Middle East and the biggest oil exporter in the world. There were also reports earlier that Saudi Arabia had dispatched tanks to Bahrain to discourage protests. Those reports were subsequently denied by Bahrain's government. Oil prices are elevated again today, although they remain off the recent highs.

Saudi Arabia had escalated preemptive security measures in recent weeks and King Abdullah has even doled out $36 bln in cash to the people, hoping to head-off unrest. Those efforts may have been for naught. The benchmark Tadawul All Share Index tumbled nearly 7% today and Saudi CDS premiums surged more than 400bp on speculation that Saudi Arabia might be the next country in the region to experience large-scale protests calling for political reform. I suggested back on 01-Feb that nothing would please the Iranian government more than a fall of the House of Saud as it could severely destabilize the region. The fear is that Iran would likely gain in power/influence in this event and US influence would be further eroded.

A populist revolt in Saudi Arabia would also pose a significant diplomatic problem for the Obama Administration. For better or worse, the US has maintained very strong ties to the Saudi Royal Family for decades. Of course, the same was true for recently ousted Egyptian President Hosni Mubarak. Mubarak however was easier to abandon because Egyptian oil exports were inconsequential. Regarding Saudi Arabia, the US would have to weigh its position on people calling for reform of an authoritarian regime versus the devastating impact on the already moribund US economic recovery that would likely result from a disruption in Saudi oil production. As Winston Churchill once famously said, "we never desert our friends...Unless we have to."

The dollar's extension to new lows for the year during today's significant uptick in geopolitical uncertainty further highlight the greenback's waning role as a safe-haven. The risk that US influence in the strategically important Middle East is vulnerable to further erosion is certainly factoring in to recent dollar losses. This will only hasten the ongoing deterioration of the dollar's status as the world's reserve currency.

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

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