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FOCUS: Too Many ‘Ifs’ For Markets Regarding Syria

By Debbie Carlson of Kitco News
Friday September 06, 2013 8:54 AM

(Kitco News) -  Gold and other financial markets have so far ignored the ratcheting tensions over a potential military strike against Syria by the U.S., but that could change if military action occurs.

Several analysts said it’s hard to say at this time how markets would react because strikes haven’t happened. There are a lot of variables to consider, they said, including what type of military strike might occur, who would support the U.S. and what type of possible retaliation might come from Russia and its allies, who traditionally support Syria.

In general, analysts said gold and crude oil prices will be volatile, with some analysts saying that gold’s strength will be tied to crude oil. If crude oil rises, so will gold, they added.

“Oil markets are not likely to calm down anytime soon as hot or heating up geopolitical, macroeconomic and fundamental factors will ensure price volatility will remain for the time being. Under these types of market conditions placing big bets on either side of the coin comes with big risks,” said David Bouckhout, energy analyst at TD Securities, who said in the medium-term oil prices could trade lower from current levels.

Those current levels are $105.95 a barrel for Nymex West Texas Intermediate crude oil and $111.40 a barrel for Brent. Their fourth quarter average price forecast is $98 and $105, respectively.

Jim Steel, analyst at HSBC, said this week that the potential for Mideast tensions to intensify “would be bullish for bullion, in our view. The safe haven demand for gold is currently strong and is likely to remain so as long as the geopolitical thermometer remains high. A key reason for gold to rally in response to Mideast tensions is the potential for oil supply disruptions that a U.S. strike or an escalation of the conflict may trigger,” he said.

At this week’s Group of 20 meeting, Russian President Vladimir Putin stood firm in his view against U.S. intervention in Syria without the backing of the United Nations. President Barack Obama is seeking Congressional approval for military action.

So far it’s unclear what will happen next week. News reports, overnight Thursday and early Friday, said there’s no timetable for when the House of Representatives will vote on a resolution to allow military strikes. Even though House Speaker John Boehner, Majority Leader Eric Cantor and Minority Leader Nancy Pelosi have publicly stated their support of military strikes against the Assad regime, rank-and-file members aren’t necessary in agreement.

On Wednesday the Senate Foreign Relations Committee voted to allow Obama to use limited force against Syria, limiting action to 60 or 90 days, keeping military action to Syria's borders and prohibiting U.S. troops on Syrian soil. It will now go to the full Senate for a vote.

Dennis Gartman, editor of The Gartman Letter, echoed what several market watchers said about when the U.S. Congress might bring up the discussion of military strikes. “We cannot image that the U.S. shall take action against Syria until the President has addressed the American people and until after Yom Kippur,” which is the Jewish holiday that occurs on Saturday.

That could leave markets keeping the Syria issue on the backburner until Congress meets and focus on other market news, like the Federal Reserve meeting on Sept. 17-18, said Sean Lusk, director of hedging for Walsh Trading.

Looking at the crude oil market, Bouckhout said in the near-term “the balance of risks are tilted in favor of the upside” because of the Syrian tensions.

He said even though Syria is not a player in global oil supply, the reason why the oil market cares is that it’s close to about 35% of the world’s oil supply. “Syria’s neighbor, Iraq, is currently producing over 3 million barrels a day and experiencing an increase in violence that could get worse if the situation in Syria escalates further. While it is nearly impossible to confirm that military action taken by (for example) the US in Syria would cause supply disruptions in Iraq, the risk is there and will keep oil prices supported over the near-term at least,” he said.

Steel has said gold will need oil prices to stay strong if gold wants to hold any gains over Syrian tensions.

“A relaxation in oil prices – for whatever reason – could also undermine gold. Also unless conflicts are ongoing – a situation the U.S. Administration has said it wishes to avoid in the case of Syria – geopolitically inspired gold gains could fade quickly,” he said.

Ralph Preston, principal with Heritage West Financial, said with the talk about an intervention in Syria comes on a historical date. He also speculated on a worse-case scenario.

“There is a bit of an eerie coincidence that Congress is deliberating on a Syrian missile strike as we approach the 40th anniversary of the 1973 Yom Kippur War which caused oil prices to quadruple. If Assad miscalculates or in a desperate last attempt of vengeance, unleashes a chemical attack against Israel for U.S. missile strikes – Damascus will be held responsible and may very well face an attack by a much more efficient unconventional weapon from Israel. “

“A military exchange with unconventional weaponry in the Middle East would be a shock to the international monetary system and catch gold prices completely off guard because market psychology currently revolves around the Federal Reserve’s intentions to announce a scaling back of its bond buying program at its policy meeting on Sept. 17-18,” he said.

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By Debbie Carlson of Kitco News; dcarlson@kitco.com,

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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