Gold heads upward as Iraq crisis turns sore. Can it rise further? - Outside View by PersonalFN

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Gold heads upward as Iraq crisis turns sore. Can it rise further?
Jun 28, 2014

West Asia is passing through a crucial phase. Initially what appeared as social unrest slowly shaped into a civil war and now has transformed into full blown global crisis. Iraqi Government has been fighting with militants of Islamic State of Iraq and Syria (ISIS). Any disturbance in west Asia has a potential to break down global economy as this region is a global supplier of oil. Iraq produces more than 3 million barrels of oil every day. Any disruption in production can cause uncertainty about the supply. Whenever such crisis hit the globe, gold climbs up.

Gold: Up only because of Iraq Crisis?
Data as on June 25, 2014    (Source: ACE MF, PersonalFN Research)

Gold prices have gone up by about 5.3% in India while prices released by London Bullion Market Association (LBMA) shot up 6.3% from the beginning of June. One might be speculating that gold prices may move up further, as there is no sign of prevailing issues getting resolved soon. Recently, gold recorded a two-month high.

Although PersonalFN believes, no one can rule out a possibility of gold going up, speculating on gold prices would be imprudent. Upward journey of gold depends on future developments in West Asia.

What you may expect?

Unless oil production in Iraq is affected due to militancy, it is unlikely that, gold will surge substantially from current levels. It is noteworthy that most of Iraq's oil wells are located in the south region. About 3/4th of reservoirs of oil are in this region. Within south region too, oil production is concentrated in Rumaila field, operated by British Petroleum. As report released by International Energy Agency, share of Rumaila in total oil production is nearly half followed by West Quarna (phase I) and Zubir fields. This is a Shia dominated region. Iraqi Government still has a very strong hold on this region. It would be a difficult task for ISIS to spearhead in southern province. ISIS is a group of Sunni extremist and has dominance over northern region of Iraq. This is why global equity markets are still stable and after the initial spike up, movement of oil has somewhat cooled off. Demand for oil remains subdued as Nigerian and Angolan oil has few takers.

As estimated by UN inter-agency information and analysis unit, a number of attacks in Iraq were more than 800 per week in 2007-2008. Attacks substantially fell thereafter. In spite of such critical phases, oil production in Iraq resumed after situation on ground stabilized comparatively. Geopolitical compulsions may restrict the role of United States. In absence of any external intervention, the current crisis may not turn out to be as bad as it was sought earlier. On the other hand, if discomfort keeps the region fuming, oil importers would have to bear the brunt.

Oil and gold are likely to move in the same direction unless Iraq crisis is resolved, if other factors remain constant for gold. In the pre-Iraq crisis time, gold was drifting down across the globe as U.S. economy was turning around with better economic indicators. Dollar was firm too against other major global currencies. The U.S. fed has already started winding down stimulus package programme.

Current rise in gold prices is a good example of emotion-driven movement of this asset class. PersonalFN recommends investors to follow a personalised and well-chalk out asset allocation. You should also periodically review your allocation. Do not shy away from rebalancing if required. PersonalFN believes, any asset may rise or fall on emotions in the short term but in the long term, it's all about how sound the underlying fundamentals are.

This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund Research Firm known for offering unbiased and honest opinion on investing.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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