Only Gold is Gold
Last week HAI asserted that the near-term technicals for precious metals were “swinging more bullish.” Well, a week later, that assertion hasn’t exactly aged well. It was, no doubt, a very tough week for gold, silver, and the precious metals mining stocks. This week’s drubbing in the metals was made all the more surprising because it came amid the major geopolitical development of a sudden American and Israeli war against Iran.
To be clear, the precious metals are usually a fairly fickle geopolitical hedge. More often than not, geopolitical news events triggering safe haven bids into metals typically result in a pump and dump scenario. This week, however, we skipped the pump and just went straight to dump.
In HAI‘s view, though, the resumption of the precious metals bull is a question of when, not if. The serious Middle East conflict now under way only increases HAI‘s conviction of the eventuality of much higher precious metals prices to come—likely soon.
This week, while digesting the new war in Iran, HAI will just offer some brief initial thoughts on the war and some possible implications.
First, while acknowledging the “fog of war,” it does seem as if the oil price may be Iran’s most threatening strategic weapon.
Brent crude oil was up over 27% this week to over $92 per barrel after the Strait of Hormuz was effectively shut and Iranian strikes targeted gulf oil infrastructure. On Friday, according to the Financial Times, the Qatari energy minister even warned that the Gulf is “within days” of stopping all energy exports. Qatar’s energy minister further warned that the war in the Middle East could “bring down the economies of the world,” predicting that all Gulf energy exporters “would shut down production within days and drive oil to $150 a barrel.”
The Qatari energy minister also told the FT that even if the war ended immediately, it would take Qatar “weeks to months” to return to a normal cycle of deliveries following an Iranian drone strike at its largest liquefied natural gas plant.
So, how could weaponizing the oil price “bring down the economies of the world?” Well, beyond the obvious negative impact of potential oil shortages, according to a 2023 Fed study, every $10 rally in oil prices can increase inflation by 20 basis points. By that math, an oil spike to $150 per barrel could spike U.S. CPI inflation back up toward 4.5%.
In addition to oil exports being interrupted by the closure of Hormuz, 18% of global ammonia supply and 33% of global urea supply is also currently interrupted. That means we have a brewing fertilizer shortage likely to cause fertilizer price inflation and, eventually, by extension, food price inflation. Add in a shortage of sulfuric acid due to the closure of Hormuz, and the cost of leaching copper oxide is going to jump as well.
If you add food price inflation and copper price inflation to the Fed’s math on oil price impacts to CPI, HAI would certainly take the over on 4.5% CPI inflation at $150 per barrel oil.
All else equal, that sort of higher inflation would translate to higher U.S. Treasury yields (which we saw this week), and those higher Treasury yields would mean higher government interest expense payouts (further stressing the fiscal crisis), a slowing of the economy (further stressing the fiscal crisis because of lower tax receipts), and pressure the stock market lower (further pressuring the fiscal crisis because of lower capital gains taxes).
That added pressure on the economy and market from higher interest rates would be coming at a time when, just this week, we already had additional serious cracks to private credit (Blackrock just limited withdrawals from its $26 billion private credit fund), and we got a nasty print of 92,000 jobs lost in Friday’s non-farm payrolls report (versus expectations for a 50,000 job add).
In short, a pop in inflation could hit the U.S. fiscal crisis hard, and start a debt-spiral as outlays increase while receipts dwindle. That is, of course, unless the Fed implemented some form of yield curve control to cap yields, cut interest rates to the bone, and injected stimulative liquidity into the market—despite what would already be high levels of inflation.
Needless to say, however, if the Fed acted to cap yields and stimulate into already high inflation, the dollar would take the big hit, very likely getting crushed. Conversely, gold would certainly be the outsized beneficiary.
So, while the U.S. has the undisputed edge on serious military might, Iran, at least as of this week, seems to have enough military heft of its own to weaponize oil and inflation. That certainly could be a weapon of mass destruction. Adding all of this up, it seems the U.S. needs a decisive victory quickly, or Iran’s economic warfare may start to take a very nasty toll.
Further underscoring the U.S. necessity for a quick victory, according to a Wall Street Journal article this week titled “U.S. Races to Accomplish Iran Mission Before Munitions Run Out,” U.S. military munitions stockpiles appear alarmingly tight. So if the U.S. can’t decisively win soon, the odds quickly favor Iran’s ability to make this a protracted affair and potentially inflict massively negative economic impacts.
Concern appeared to be growing this week that a quick and tidy U.S. victory may not be in the cards. According to Politico on Thursday, “a conflict expected to last ‘weeks’ is now stretching into months and threatening to dominate Donald Trump’s presidency.”
HAI hopes for the very best possible outcome from the current Middle East tragedy, but must also highlight the very real risks. In HAI‘s view, it is the U.S. military that effectively backs the “rules-based global order” of the last 50 years. Any clear and public failure to achieve quick and decisive victory in Iran that exposes U.S. military weakness (especially if, simultaneously, Iran scores a decisive hit on a very vulnerable U.S. economy/fiscal position) could radically change that global order—overnight. In any such event, hold close to gold. There is currently no other asset that can replace U.S. Treasuries as the global reserve asset.
If the rules-based order falls, we’re in a vacuum. At least temporarily we’re left in a world without rules. Without rules, there’s no trust, and without trust, the world will need to drastically reduce dependency on credit and counterparty risk—and only gold is gold at that point.
Weekly performance: The S&P 500 was off 2.02%. Gold was down 2.53%, silver was crushed by 10.11%, platinum was down 9.34%, and palladium was off 9.38%. The HUI gold miners index was creamed by 11.74%. The IFRA iShares US Infrastructure ETF was off 3.30%. Energy commodities were volatile and much higher on the week. WTI crude oil surged 36.18%, while natural gas gained 11.30%. The CRB Commodity Index was up big by 12.62%. Copper was down 3.54%. The Dow Jones US Specialty Real Estate Investment Trust Index was down 1.64%. The Vanguard Utilities ETF was off 2.07%. The dollar index was up 1.29% to close the week at 98.87. The yield on the 10-yr U.S. Treasury was up 18 bps on the week, closing at 4.13%.
Have a wonderful weekend!
Morgan Lewis
Investment Strategist & Co-Portfolio Manager
MWM LLC
