GOLD AND COMMODITIES ARE SET TO SOAR / MACLEOD FINANCE

Gold and commodities are set to soar

Don’t be misled by market stasis. Events in the Middle East are not being taken seriously in financial markets when in fact they are driving the global economy off a cliff.

ALASDAIR MACLEOD 

Suddenly, gold and silver appear to have bottomed out and are marching higher. 

Led by energy, the entire commodity complex is donning its marching boots and setting off for higher pastures. 

This is the reaction to the US blockade in the Sea of Oman. 

Mine supplies of base metals and silver are threatened by energy costs and shortages of vital chemicals such as sulphuric acid. 

The impact on consumer prices is being seriously underestimated.

It’s not just supplies of energy and downstream products such as sulphuric acid and fertilisers being restricted as a result of America’s war on Iran, and now its blockade of a blockade. 

Other national exporters of these vital commodities are hoarding their supplies, withdrawing them from global markets. 

There are signs that China is also tightening up on silver and rare earths. 

Why would they do otherwise?

Paper prices under-represent the impact. 

Dated Brent FOB Northern Europe is trading at $145—$150, over 50% above paper futures, according to today’s Daily Telegraph. 

Think about that for a moment!

Yet markets ignore the reality, just as the blockade intensifies.

It appears that the Iran war, at least with the US has moved from carpet bombing to economic attrition. 

Israel appears to want to continue breaking the ceasefire, so this is not a pure argument. 

However, by stopping Iran’s exports to China, China is now centre stage. 

But she can sit it out, with her massive oil stockpiles and alternative sources of supply.

It’s become a game of chicken against the whole world, which America is unlikely to win. 

It amounts to a deliberate policy of throwing the global economy, and America’s own under the bus.

In an earlier article, I pointed out that the oil shock of 1973—1974 led to a subsequent combined economic slump and inflation shock peaking at 11.1% in 1974 in the US, 24.2% in the UK in 1975, 13.7% in France in 1974, and 23.2% in Japan in 1974. 

While in percentage terms the oil shock was greater than this one so far, this one is more widespread in its consequences. 

With her government debt to GDP at 255%, and interest rates at less than 1%, Japan which is the world’s exporter of capital is in the deepest trouble. 

In 1973 she was in a far stronger financial position but suffered inflation at 23.2%.

Another thing to think about.

Inflation of consumer prices arises from governments trying to avoid the economic consequences of an oil shock — a slump in business activity and soaring unemployment. 

They print currency and bank reserves to make credit available to pay higher prices, and politics leaves no alternative to introducing price controls on essential items. 

A combination of killing off supply by price suppression and currency debasement leads to higher credit risk, higher bond yields, and higher gold prices, the last reflecting declining purchasing powers for currencies.

So, why is this not being reflected in markets to date?

There appears to be two broad answers. 

The first is that investors and traders are mentally committed to the status quo ante. 

We saw this in the 2008—2009 crisis. 

It was perfectly obvious that there was a major property crisis driven by excess credit combined with liar loans looming, as watchers of The Big Short will attest. 

Michael Burry’s short positions were very badly squeezed before the sleepy Wall Street establishment awoke to the crisis and the S&P halved.

The second is that the establishment, from the IMF downwards doesn’t want to trigger a panic. 

In the last few days, the IMF revised its economic forecasts to take account of the Iran crisis. 

It changed its growth forecast for the US economy from 2.4% to 2.3%. 

Japan, which imports 90% of her oil from the Gulf is forecast not to be impacted at all. 

Britain gets the worst downgrade at 0.5%.

They must be kidding!

We should know how Michael Burry must have felt in early-2008. 

The situation today is equally surreal. 

Something will trigger a snap back to reality, and the market adjustment will be lifechanging for investors, in a very bad way. 

Other than a gathering slide into the abyss of a credit crisis, the most likely candidate is probably the Houthis blocking the Red Sea and effectively Suez. 

An additional 6 million barrels per day from Saudi Arabia’s Yanbu terminal will be taken off the market.

Gold doubled in 1974 from $90 to $200 in response to the oil shock. 

This time, G7 government debt to GDP has more than doubled on average from the mid-seventies, putting these economies on a far more perilous footing. 

Furthermore, central banks around the world are running scared of the dollar and the other G7 currencies which is why they are buying all the bullion they can get their hands on.

Worse, for investors fully invested in the status quo ante they own almost no gold and are standing naked facing what is to come. 

They need to get out of credit urgently, which includes fiat currencies, into the protection of real money.

That’s what a firming bullion price is telling us.