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The Bullion Report

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February 9, 2011 in 'The Bullion Report'

Gold in the Middle EastGold in the Middle East


2-9-11

 

At the risk of getting lost in the sea of articles focusing on the tensions in Egypt, I thought it was worth exploring gold demand in the Middle East. There are obvious investment links to this hotbed of geopolitical activity, but don’t let recent unrest steal the total spotlight from the overall demand activity in that quarter of the world.

2-9-11 gc

Past performance is not indicative of future results.

***chart courtesy Gecko Software

 

First let’s dispense with the obvious ties to precious metals markets. The Middle East has historically fomented geo-political tensions which can motivate prices to move higher. The reasoning behind this is the same as I have explored in other issues – the fear factor. During times of troubling issues – protests, wars, general tensions – the markets seem to get the jitters and this compels some investors to seek the “haven” of precious metals. This latest round of unrest, focused specifically on Egypt, helped hike precious metals and oil prices. Fear feeds these movements. Uncertainty over possible outcomes can add fuel.

There is a lot of money in certain parts of the Middle East. Egypt, Saudi Arabia, and other nations that comprise this region of West Asia and North Africa are home to some very wealthy people, and the World Factbook rates all countries in the Middle East as experiencing positive growth. A lot of the wealth comes from oil, banking, and some tourism. When there are wars, protests or tensions, all three of these major economic pillars have the potential to be undermined. The big question would be whether or not investors in these areas would then move assets into precious metals in an attempt to preserve wealth. Alternately, the disruption to some oil supplies has driven energy prices higher and brought gold investors out to seek inflation havens.

 In times of peace, the wealthier nations in the Middle East also contribute to the overall demand dynamic of the precious metals markets. Gold demand for investment and for jewelry can often be far higher for the region than that of the United States or other European and Asian countries. The latest quarterly report from the World Gold Council shows the level of consumer demand:

 

2-9-11 gc investment demand  

Past performance is not indicative of future results. Chart courtesy of the World Gold Council.

 

Why so much investment and jewelry demand? Wealth in some nations of the region is a primary reason. Another comes down to cultural norms. There are some strict traditions and religious rules on who can wear gold jewelry, but traditionally countries like Saudi Arabia have strong jewelry demand. The religious holiday of Eid al-Adha is often cited in the news as an important time for gold purchases. Much of the jewelry and gems produced in India are actually destined for these markets—As much as 44 percent of it. (1)

 

2-9-11 gc jewelry demand

Past performance not indicative of future results.

 

In the last few years, there has been a dynamic shift as investment demand for gold fills the void where jewelry sales may have slumped. Following the economic crisis, there was a definite drop in gold demand in the Middle East. According to the 2009 Q4 report from the World Gold Council, demand dropped over 30 percent, with Egypt and the UAE in particular showing large declines. (2) Likely this demand slump came on the heels of the Dubai World debt issues. With this debt behind one of the wealthiest members of the region, there is plenty of potential to see resurgence in demand. In fact, the 2nd quarter of 2010 saw jewelry demand in Saudi Arabia pick up steam – with a 5 percent rise. (3) It will be interesting to see how these trends may have developed when the World Gold Council releases its next gold demand update.

 

Summary

 

Unrest or geopolitical tensions in the Middle East can have a two-fold effect on gold and other precious metal demand. On the world scene, the potential for war always seems to add a little spice to the fear-based trade, bringing in investors who are looking for price gains or wealth preservation potential. On a more local level, the removal of assets to other investment forms, including gold, can provide a further catalyst to drive gold demand higher. Certainly in the economic unrest since the 2008 financial crisis, many economic centers in the region appear to have seen a decline in jewelry purchases met with an increase in investment demand. With so much money, and important commodities like oil coming from the Middle East, it is worth keeping an eye on their precious metal demand trends in times of tension, as well as times of peace.

 

1. http://www.commodityonline.com/news/India-gold-jewellery-export-to-Middle-East-booms-32798-3-1.html

2. http://www.ameinfo.com/224415.html

3. http://www.menafn.com/qn_news_story_s.asp?StoryId=1093363306

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Disclaimer: The prices of precious metals and physical commodities are unpredictable and volatile. There is a substantial degree of a risk of loss in all trading. Past performance is not indicative of future results.