What We Should Make Of Monday’s Price Action In Gold
On Monday, the US announced that it has proof that Syria possesses chemical weapons
and that it has been providing safe passage to top Iraqi Baath party members.
Moreover, the White House, State Department, and the Pentagon warned this Arab
country to carefully “ponder” the implications of these actions and that
the US has a “variety of levers” at its disposal. to persuade it to change
its current policies. This type of rhetoric would have sent gold prices soaring
just a couple of weeks ago, as the fears of more violence and uncertainty would
have sent investors rushing to safety. But today, gold actually fell 1.1%. What
happened?
The difference
between today and two weeks ago is that America’s decisive military victory (in
the major military operations phase of the war) in Iraq has now given it
tremendous leverage to pursue its foreign policy agenda through diplomatic
means. And there are now signs that some of the more hostile nations on the Bush
radar screen have been frightened by the outcome of the war and are now
rethinking their previous positions. For instance, North Korea, over the
weekend, announced that it is dropping its demands
to meet one-on-one
with US officials to discuss the future of its nuclear program.
Furthermore, Russia, a North Korean sympathizer and American
antagonist as of late, announced that a nuclear-armed North Korea was against
Russian national interests.
These developments certainly don’t bode well for the
price of gold, as there is still a significant amount of risk premium embedded
into the price of the precious metal. And I suspect that countries such as
Syria and Iran will be increasingly willing to cooperate with the United States
in an effort to avoid a fate similar to that of Iraq’s Baath party.