Oil and gold rise over uncertainty

Crude oil has hit a ten-week high above $30 a barrel and gold soared to a five-and-a-half-year high over uncertainty in the prevailing geopolitical and economic conditions.

Venezuela, the world's fifth largest oil exporter, exports about two to three million barrels a day. These were halted since December 2 by a general strike organised by the Opposition, a loose coalition of political parties, unions, civic groups and business leaders. The latter united in their criticism when reforms by left-leaning President Hugo Chavez (a former army paratrooper who was deposed for two days in April) drove the country into recession, political turmoil has disrupted basic industries, closed down shops and businesses and caused creeping food and petrol shortages.

Half of Venezuela's oil exports go to the US. This accounts for about 14 per cent of Americaís oil imports. The US has been running into oil supply deficits year on year of around 24 million barrels. Traders saw this as a risk factor, lowering US inventories especially now in the winter season where crude oil is high in demand. The latter was seen by the market as an addition to bullishness in oil price, which increased by more than $4 a barrel since mid-November.

The threat of war with Iraq further increased the risk of oil shortage which affected the price of oil. Both Venezuela and Iraq are members of the Organisation of the Petroleum Exporting Countries (OPEC) covering approximately 70 per cent of the world's crude oil demand.

Furthermore OPEC has agreed to cut oil supplies since the cartel aims to restore the market confidence in its discredited system of quota limits. This in effect further amplified the potential of oil shortages.

The price of gold hit its highest level in more than five years last week as weakness in the dollar, rallying oil prices and fears of a war with Iraq opened the gates for a flood of fund money into the safe-haven asset.

As with other safe haven assets such as Treasuries and gilts, which are seen shining again, gold prices have climbed 23 per cent this year, stimulated by geopolitical tensions from the Middle East to Kashmir and a fall in global equity markets and the dollar.

Gold's latest jump was triggered by a weakening of the US dollar against the euro which added to fears over higher oil prices and a growing list of political tensions. The dollar has fallen to a new three-year low against the euro as the market is focusing on the prospects of war with Iraq.

Investors are weighing a potential war with Iraq as a huge financial burden which was reflected in the dollar's drop in value against the euro and the yen. The market is foreseeing that energy costs could hinder economic recovery thus shifting again to safe haven assets.

e-mail: mazzopardi@jmfs.net

(The value of investments can go down as well as up. Past performance is no guarantee for future performance. This article does not intend to give investment advice and the contents therein should not be construed as such. Readers are encouraged to seek professional advice regarding their personal financial situation.)