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12 April 2024

Gold up 10% on Iran rumours

An employee counts some gold bars before he sells them to a customer at a gold shop in Hanoi August 23, 2011. (REUTERS)

By Vicky Kapur

Gold prices are currently trending around the $1,730 per ounce mark, within touching distance of their 60-day high of $1,747/oz, and up 10 per cent in the first 30 days of 2012.

Fuelling the bullion’s newfound drive are rumours that India and China, one of the world’s largest oil consumers, are secretly mulling paying in gold for Iranian oil, and bypassing a European Union (EU) oil embargo on Iran, effective from July 1, 2012.

The EU voted last Monday to ban oil imports from Iran. The move came after a defiant Iran announced earlier in January that it had launched a nuclear enrichment programme at a well-protected underground facility near the city of Qom.

Western nations suspect Iran, which is already under numerous international sanctions, of pursuing a secret nuclear weapons programme but Tehran insists it needs nuclear power solely for civilian purposes.

Nevertheless, the new EU sanctions are being seen as a way for the Western world to bring Iran to the negotiations table, but any move by China and India, which together purchase more than one-third of Iran’s oil, to bypass the sanctions will significantly reduce the EU’s negotiating prowess.

India, which has had traditionally friendly relations with Iran and has found a relatively new ally in the US, is in a precarious situation and has reportedly been working at finding a middle ground and strongly urging for a diplomatic solution.

Iran has already made numerous threats of closing the Strait of Hormuz, through which a large chunk of the world’s traded oil passes, in case new sanctions are followed through. Moreover, the head of Iran’s state oil company has said that the EU embargo on Iran’s oil exports will push world oil prices to $150 per barrel, something that the fragile world economy can ill-afford at this time.

Nonetheless, there are unsubstantiated rumours floating in the international market that India might have already concluded a swap arrangement by which the payment for Iranian crude will be made in rupees and partially in gold. Two banks have been mentioned in this context, the UCO Bank of India and the Turkish Bank Halk Bankasi.

Speculation is also rife that China, the No. 1 buyer of Iranian oil, may follow India’s lead. Together, the two nations account for over $30 billion in annual oil purchases from Iran, which would be a significant amount of gold replacing the dollar in trade.

These rumours, compounded by a simultaneous decline in the dollar’s value, has seen gold gallop by more than $165 an ounce in the past 30 days, and is currently hovering around $1,730 per ounce.

There is also the prospect of further quantitative easing in the US, with the Federal Reserve ready with additional cash-injections as and when required. Further stimulus by the Fed would be seen as a negative on US economic health and encourage inflation, pushing wary investors back to the safe haven refuge of gold.

That said, gold has seen its safe haven status diminish substantially in the recent past, declining 20 per cent from highs above $1,921 per ounce to lows of $1,520 per ounce in a little over three months last year. While these rumours are currently pushing prices back up, any resolution of the Greek debt crisis and the Iranian situation could as well see spot gold fall back to $1,500-levels.