Gold and silver in wartime
Alasdair Macleod
Some analysts tell us that gold goes down in war.
This is rubbish.
Otherwise, why would countries in the past have suspended their gold standards at wartime?
There are some specious arguments being advanced for the lacklustre performance of gold and silver in recent weeks, and the argument above is just one of them.
But what makes current financial markets interesting is that the entire investment establishment with very few exceptions are Keynesian in their outlook.
We can define this in a simple phrase — there is an unfounded belief that governments can manage economic outcomes.
The problem here is that by managing outcomes governments always make things worse.
And just occasionally the consequence is a crisis.
Drop the Keynesian la-la stuff, and we can see the approaching crisis clearly.
There are a number of elements to it which give MacleodFinance easy copy, but the purpose of this report is to look at it with respect to precious metals.
This week, gold and silver showed signs of turning a corner after their major declines since end-January.
This morning they are tickling a little better, but investors need to focus on the big picture.
America’s war against Iran is intensifying, with the prospect of further escalation this weekend.
Already, oil prices are moving higher, with WTI challenging the $90 level.
Furthermore, this crisis is spreading to the Red Sea, closing off the Saudi terminal at Yanbu which we are told delivers about 5,000,000bpd.
The crisis appears to be accelerating, with oil price increases entering a second phase.
It is worth looking in some detail at a similar situation in the past, which brings us to the 1973—74 OPEC crisis.
The relationship between gold and oil is shown below:
In August 1973, OPEC raised the reference price of a barrel of oil from $3.56 to $4.31, a 21% hike.
The price of gold continued its decline before hitting a low point of $90 on 26th November.
Meanwhile, the Fed was cutting its funds rate from 10.75% to 10%.
Stocks rallied about 14% on those cuts before selling off into the year-end.
Stocks briefly consolidated in early-1974 as the Fed continued easing, a policy reversed on the second OPEC oil price rise to $10.11 in late-January.
Stocks then resumed a vicious bear market into Q4, triggered by the Fed’s funds rate being increased from 9% in February 1974 to 9.3% in March and then 10.5% in April.
Several points stand out, but the principal one is that in the initial stages of an oil price hike, risk-off safety is perceived to be cash dollars, not gold.
But as it became obvious that Sheik Yamani leading OPEC was not satisfied by the first price increase and would impose another larger one gold began to rally as risk-off perceptions rapidly moved from cash dollars towwards gold.
By the time Yamani imposed the second larger hike in late-January, gold had already risen 50% in only two months to the equivalent of $6000 today before going on to a near-doubling by 27th February.
The situation today appears similar to the OPEC experience.
Markets are beginning to see that Trump has no exit from the war against Iran, a point reinforced by the Houthis closing the Red Sea to tankers loading at the Saudi port of Yanbu.
This evolution away from regarding cash currency as risk free appears to be starting, with the gold price resisting further declines.
The 1973—74 precedent is clear.
All financial markets are about to see a dramatic sea-change as the seriousness of the Gulf war and its inevitable consequences for the global economy, highly indebted governments, and the geopolitical consequences are rammed home.
It is now easier to visualise crashing bonds, crashing equities, government debt traps springing, and gold doubling in just a few months.
It will be a very unpleasant wake-up call for the neo-Keynesians.
0 comments:
Publicar un comentario