EGYPT PITS OIL AGAINST GOLD / THE WALL STREET JOURNAL ( RECOMMENDED READING )

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FEBRUARY 1, 2011.
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Egypt Pits Oil Against Gold .
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By LIAM DENNING
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When the Middle East roars, so do oil bulls. But buying gold could be the better hedge of the two against Egyptian turmoil.

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First, a warning. If extrapolating past performance in markets is risky, extrapolating from past political events is even more prone to error. Tunisia is not necessarily a template for what happens in Egypt and, by extension, events in central Cairo won't necessarily be replayed across the region.
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That said, there clearly is a scenario where Egypt descends into chaos. On its own, the threat to oil markets from that is minimal. Egypt isn't a net exporter of oil, and less than 2% of the world's traded crude goes through the Suez Canal. For that, we can thank the 1956 Suez crisis, which spurred the building of supertankers able to ship oil economically around the Cape of Good Hope.
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If unrest did spread further in the region, the repercussions for oil would start building, because it might affect exports, and more immediately it would encourage hoarding in anticipation of rising prices.
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Against that, though, oil inventories are high, one reason why U.S. oil prices trade at big discounts to Brent crude. And Saudi Arabia's oil minister re-emphasized Monday that his country could open spare capacity to help smooth out shocks. It's worth remembering that Saudi Arabia's willingness to do this helped erase the doubling of oil prices attending Iraq's invasion of Kuwait in 1990 within months.
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A price spike also could threaten fragile Western economies, which still consume much more oil than China. China itself, seeing how higher inflation has fueled Egypt's unrest, would have even more reason to crack down on rising prices at home, potentially reining in demand for energy.


Barring an extreme event like regime change in Saudi Arabia, therefore, oil could prove a volatile hedge. Gold may make more sense. Apart from the usual demand for the metal as a safe haven, gold has become highly negatively correlated to real U.S. interest rates since the financial crisis. Gold stands to suffer as signs of economic recovery appear, because this brings nearer the day rates rise sustainably.


Higher energy prices hurting U.S. consumers actually could provide a rationale for extending lax monetary policy for longer. In that environment, real gold could trump black gold.
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