Gold may hit $1200 if Middle East tensions elevate: Lennox

David Lennox of Fat Prophets, in an interview to CNBC-TV18, shares his views on crude and gold prices. He also commented on the impact of the turmoil in Egypt on both the commodities.

Below is the verbatim transcript of David Lennox’s interview on CNBC-TV18 Q: I want to understand the way this differential between Brent and West Texas Intermediate (WTI) has narrowed so significantly. We have seen big move on the WTI crude back above USD 101. While Brent has also moved up that is still relatively stable at USD 105 or so. What have you made of that? What is your sense in terms of how crude is likely to move going forward?
A: Certainly the gap between the Brent price and the crude price or WTI price has narrowed. That is basically because the demand for Brent is basically going into European zones and we have not seen any significant lift in demand from the European zones for sometime now and if you have a look at where West Texas is going, it is going obviously into the US zone and there we have seen for the first time a very significant drawdown in the Energy Information Administration (EIA) numbers this week and that would indicate that the Americans are now well and truly enjoying their drive time. That is the reason why we think that over the last couple of days we have seen significant narrowing in that margin. Q: How do you see the trajectory of WTI from hereon? We actually saw NYMEX going up, but WTI is rising perhaps a little less than NYMEX. Is the terror premium or the Middle Eastern premium now priced in and therefore it gets capped at about USD 105-106 or is this the start of a longer bull run?
A: It is difficult to tell, but we will suggest that certainly what we have seen happen in Egypt has sparked the initial rally through to USD 100. That was probably then well supported by the EIA numbers. The two together have moved the market. What happens in terms of the Middle East or Egyptian situation now is very much the political response to what we have seen in the military action and the supporters of the current or deposed president what they will do. The market will be watching for a response and will then react one way or the other as to what that response is. If it is a confrontational response which looks likely then we could possibly see crude and Brent prices rise further. Q: We have seen some resilience creep in gold at that USD 1,200 mark. There was just one dip below that level and after that USD 1,240 has stood. Is that the bottom that we have seen for the moment or this consolidation actually preparing the market for a much bigger spike lower as and when QE is rolled back?
A: Last we spoke, I suggested we were hoping it would hold onto USD 1,300. It is really again the markets reacting to what is happening in the Middle East. The problem that the market is seeing is that we are seeing a rise in the rule of the gun rather than anything else and region is very unstable and we think that gold will probably react to further news coming out of the Middle East by rising. But having said there is still a significant amount of gold that is in speculative investment hands and we have not seen a natural rise in demand from the fabrications out of your own country at the moment. We did see that spike in the December quarter, but that does not seem to have followed through. So gold could potentially stay quite volatile and it could possibly visit USD 1,200 again if the Middle East does start to become a little more subdued.