Fears of Contagion Push Gold Prices to an All Time High

The problem here isn't whether or not the global oil market can weather the Libyan protest, but rather the fear of such a movement reaching Saudi Arabia, the #1 global oil producer in the world. Although Libyan crude oil is highly attractive due to its low sulfur content and relative location in relation to the earth’s surface (making it easily accessible), the country simply does not produce enough at the moment to pose a major threat to the global oil supply.

The true problem lies in the Islamic belief of "One direction, one people, one god". This fundamental belief has many fearing that it is only a matter of time before the current wave of social unrest hits Saudi Arabia. With other Islamic countries already in the mix, such as Algeria, Libya, Tunisia, Iran, Yemen and Bahrain, what's there to prevent such a fear from quickly becoming a reality?

From an investor’s point of view, such anticipated chaos would inevitably drive oil prices to $200 a barrel. This not so far-fetched future reality has pushed the price of gold to an all time high of $1,440.31, which clearly shows a pricing in of contagion regarding political, social, and military unrest.

  

If commodity prices continue to rise, Bernanke would be forced to extend QE2 beyond the expected June 2011 completion date in order to control price instability and U.S economic growth. Without further monetary policy, the United States would most likely experience another recession due to a decrease in per capita discretionary income.

As an investor in gold, taking a long position, this is profitable news. The stars have aligned.

1. Global political and social unrest
2. North African and Middle Eastern contagion
3. A rise in global oil prices due to fear of a shortage in supply
4. More Quantitative Easing and federal intervention
5. Further devaluation of the US dollar

My recommendation on February 20th was to buy on the pullback, which would have certainly been profitable; however it is not too late. Gold prices will continue to rise.

Recommendation: BUY