Oil, Gold, and Silver Prices Reflect International Coalition Shortcomings in MENA

Includes: GLD, OIL, SLV, USO
by: Carlos X. Alexandre

First and foremost, and as reported by Reuters last night, “Gaddafi ‘accepts peace roadmap’: South Africa's Zuma,” and I hope this is the real deal. But the writing has been plastered on the wall. Instability has a way to propel oil and precious metals higher, and the current geopolitical landscape is fertile ground for conspiracy theories, apocalyptic dreams, and allodoxaphobia when views are a bit off the beaten track.

As a side note, the various spellings of the name Gaddafi is due to a lack of a "universally accepted authority for transliterating Arabic names," according to the The Christian Science Monitor.

We find ourselves in the midst of uncommon times, and currency games keep most of us off balance, with the European Central Bank and Federal Reserve playing ping-pong with each other, while the rest of the World simply observes and acquires uncomfortable neck pain. Portugal’s expected bailout didn’t affect the markets, and I am starting to believe that Spain will never seek help from the European Union. Not that the country doesn't need it, but the Union can’t afford the publicity, and plenty of backdoor support will be sent Madrid’s way.

The euro is now at $1.44, and let’s not forget that it was introduced at $1.17 at a time when only one currency in the group required more than $1 to be exchanged – the Irish pound. Thus, the parity nonsense was addressed over 10 years ago, making a Hollywood inspired debut, and fooling European citizens into thinking that the euro was superior, when in fact is just another piece of paper. Purchasing power didn’t change and actually diminished in the weaker countries.

But oil, gold, and silver prices picked up steam this past week, mostly due to changed perceptions of the future, not the fundamental economic background. But perceptions about what? I have been observing the interesting price movements and news developments since the beginning of the month, and while the U.S. dollar fell 1.5% last week, especially with the political budget wars on the front burner as a contributory factor, oil increased 4.2%, gold enjoyed a 3.1% run, and silver popped 7.3%, reaching for an overbought condition.

My opinion has not yet changed that oil will seek the $60 mark by the end of the year from a pure fundamental perspective, but I am not oblivious to geopolitical factors that drive perceptions and prices accordingly. I didn’t see the North African’ turmoil coming, but have adjusted to the environment quite well because I refuse to wear blinders.

The big story is certainly Libya, and how it has now become a sticky wicket, with the International community incapable of delivering much-wanted stability. Gaddafi is winning – even if he only keeps the status quo -- and one fear is that his resolve will teach other dictators in the region to fight another day, increasing the odds of a true disruption in oil supplies. In short, Gaddafi's strategy is doable. As Reuters reported:

The head of U.S. Africa Command, General Carter Ham, said on Thursday the conflict was entering stalemate and it was very unlikely the rebels would be able to fight their way into Tripoli to overthrow Gaddafi.

But the driving factor behind the price increase is directly related to the United States, or its absence. In the past, we have always heard the world moan and groan about the U.S. behaving like an empire and being the international police, and I will concur that at times there’s some validity to that perception. Then on April 2, CBS News reported “U.S. backs off in Libya as Gaddafi holds on.”

(NYSE:AP) WASHINGTON - Two weeks after a dark-of-night barrage of mostly U.S. missiles and bombs opened the international air assault on Libya's Muammar Qaddafi, the American combat role is ending, the rag-tag rebels are reeling and the Pentagon is betting its European allies can finish the job.

I am certain that most Americans welcomed the news — and I am one of them — but what is troubling is that the Pentagon’s bet is not likely to pay off, even with CIA agents on the ground – and so the price of oil and precious metals took off. Why? Because without direct American involvement, the allies cannot get the job done. I know it’s harsh, but it’s the truth. Similar to my position on the reserve currency issue, I say “Let’s step back and let others handle it!”

But even rebel sentiment is changing. According to Reuters, Abdel Fattah Younes, head of the rebel forces, said, "Either NATO does its work properly or we will ask the Security Council to suspend its work." Meanwhile French President Nicolas Sarkozy appears to want most of the credit, and on March 22 the Guardian reported that “Sarkozy opposes Nato taking control of Libya operation.”

While France has been giving the impression it is heading the operation, the military attacks on Libya are, according to Juppé, [French Foreign Minister] "an operation co-ordinated by the US in direct collaboration with the French and British authorities". It is being led from US bases in Germany and Italy.

Good for Nicolas. Show the world what you’re made of. Interestingly enough, Reuters reported on April 7 that Bernard-Henri Levy, a French intellectual and pacifist, was the catalyst for President Sarkozy’s decision to support the rebels. And then Mr. Levy displayed his naiveté.

Levy, an avowed pacifist, told a briefing with foreign media that he believed the coalition campaign should be over in weeks despite slow progress made by the ragtag forces seeking to oust Muammar Gaddafi.

The Financial Times had probably the better piece on current conditions within the coalition, titled “Europe feels strain as US alters Libya policy.” The following excerpt summarizes the issue quite well:

What we’ve seen in Libya is hugely significant,” said Lord Hutton, a former defense secretary in the last Labour government. “The US has been saying for 10 or 15 years that it wants the Europeans to share more of the security burden and we have to heed that lesson. We should be doing much more in Europe. We cannot go on expecting the US to take the leading role.”

Nicholas Burns, a former US ambassador to Nato, added that a Washington burdened with the wars in Afghanistan and Iraq welcomed the Franco-British lead, even though it is the first time in Nato’s 62-year history that the US has not been in a clear leadership role in an alliance operation.

But he warned: “There’s a concern in the US that the European allies will not be able to match the intensity of air and sea operations that the Americans had in the first two weeks of operations ... The potential challenge is can they deliver an effective military response that will push Gaddafi back and can they avoid the political disunion in a fractious Nato alliance over air strikes going forward?

In addition, “’Lots of people are interpreting this as a very direct signal from the other side of the Atlantic that it’s high time the Europeans got their act together,’ said a senior British defense official.”

What if the turmoil spreads? How will the coalition handle it? The oil, gold, and silver markets appear to know the answer and are reacting accordingly. Even if Gaddafi compromises and seeks a solution, removing some fear premium, the cat is out of the bag.

If the catch of the day is SPDR Gold Trust (GLD), U.S. Oil Fund (USO), iShares Silver Trust (SLV), or anything in between, instability is providing the wind beneath their wings, not to mention a few shorts that are a bit confused because conditions haven’t gotten any worse. However, the risk exists if the jet stream changes direction.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.