Oil Shock! Will War Drums, Inflation Fears Ignite Gold and Silver Markets? / Commodities / Gold & Silver 2019
Monday’s spike in crude oil prices could be a game changer – forgeopolitics, for the economy, and for investors.
Normally it would be foolhardy to draw big, sweeping conclusionsfrom a single day’s trading activity.
But in this case, it’s not just the fact that oil prices surged13% to over $62/barrel. Or even the fact that more than 5% of the world’s oilproducing capacity suddenly got taken offline.
The world can cope with volatility in the energy market. Anincreasingly volatile environment for all assets presents much greaterchallenges.
But few investors are positioned to cope with the rising risk ofwar in the Middle East. Few are prepared for the prospect of persistentlyhigher energy prices and higher inflation. Even fewer are taking steps toinsulate their portfolios from future black swan events.
Black swans by their nature are impossible to predict. No onesaw a devastating drone strike on Saudi Arabian oil production facilitiescoming.
Delivering the biggest single blow in history to the global oilsupply turned out to be surprisingly easy.
Unfortunately, it may be just as easy for terrorists or roguestates to target electrical grid infrastructure, nuclear power facilities,computer systems, or gatherings of world leaders. A single, crudely executedstrike could not only inflict disproportionate damage to the global economy butalso potentially trigger a full-scale war.
President Donald Trump says the United States is “locked andloaded,” ready to attack Iran for its alleged role in shuttering the Saudis’oil facilities.
Republican Senator Lindsay Graham is suggesting we bomb Iranianoil refineries in retaliation – a move that could trigger another oil pricespike and possibly provoke a Russian response.
Things have escalated rapidly since President Trumpcontroversially planned – then cancelled – a meeting with the Taliban lastweek. He then proceeded to fire his national security advisor, John Bolton, whohad been pushing for war with Iran.
That upset some of the war hawks on Capitol Hill. But the suddenattack on our putative ally Saudi oil machinery gives them one of their bestopportunities to push Trump toward war.
How can investors best position for rising risk factors inheretofore sanguine markets?
Monday’s dramatic market moves offer some guidance. Energystocks surged. Gold and silver gained0.8% and 2.5%, respectively, on safe-haven buying.
The major stock market averages fell, but only modestly. Therewas no indication of panic selling taking hold.
Of course, the government’s Plunge Protection Team had theweekend to get circuit breakers on the exchanges in place. President Trump alsovowed the U.S. would stand ready to tap the Strategic Petroleum Reserves ifnecessary to boost oil supplies.
Investors appear to still be largely complacent when it comes tothe threat of future oil spikes.
For the past few years the conventional wisdom has been that oilsupplies are plentiful and therefore prices should remain low. But those lowprices reflected, to some extent, complacency about geopolitical risks.
Low oil prices have wrecked many marginal producers. Frackersand deep-sea drillers have been practically obliterated during a brutal bearmarket for the oil and gas sector that extended into this summer. It couldleave a legacy of severe under-investment in oil production capacity.
The last five recessions were each preceded by a run-up in crudeprices of at least a 90%, according to DataTrek Research. A one-day spike won’ttrigger a recession, but we are very late into the economic cycle where theenergy sector typically assumes leadership, before the economy and stock marketroll over.
A surge in oil prices would put the Federal Reserve in a toughposition. Rising energy costs hurt consumers and raise the odds of a recession.But if the Fed tries to help the economy by stimulating, it risks pushingenergy prices, and price inflation more broadly, even higher.
If the Fed cuts rates again this week as expected, it will bebetting that the oil spike is transitory and that inflationary pressures remainwell contained.
The markets will have their say after the central bank releasesits policy statement on Wednesday. If investors sense monetary policy isheightening inflation risk, they will likely bid up precious metals.
Physical precious metals are, in a very real sense, a form ofstored energy. It takes an immense amount of energy to mine ore from the earthand refine it into lustrous gold and silver coins youcan hold in your hand.
Higher energy and labor costs will ultimately translate intohigher production costs for metals and higher spot prices. A surge insafe-haven demand from investors could have an even bigger, more immediateimpact.
Perhaps one day headlines will appear throughout the mainstreammedia describing gold and silver price shocks that nobody saw coming.
Stefan Gleason isPresident of Money Metals Exchange, the national precious metals company named 2015"Dealer of the Year" in the United States by an independent globalratings group. A graduate of the University of Florida, Gleason is a seasonedbusiness leader, investor, political strategist, and grassroots activist.Gleason has frequently appeared on national television networks such as CNN, FoxNews,and CNBC, and his writings have appeared in hundreds of publications such asthe Wall Street Journal, Detroit News, Washington Times, and National Review.
© 2019 Stefan Gleason - All Rights Reserved
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