The Return of History
As we welcome the month of May, we are two months into the U.S.-Israeli war with Iran, the vital Strait of Hormuz remains closed, and that closure is still choking off roughly 20% of the world’s oil and gas supplies.
As of this week, the latest efforts to resolve the conflict via negotiations have hit an impasse amid a tentative ceasefire that’s been in place since April 8th. Iran is still blocking the Strait, and the U.S. is still enforcing a naval blockade of Iran’s oil exports.
Meanwhile, each day the Strait of Hormuz remains shut, the world is using up commercial stockpiles, strategic reserves, and crude previously stored in vessels—and those supplies are now running short.
As the CFO of a major U.S. oil and gas company told Bloomberg TV on Friday, “There’s very little of the buffer left… If you look at the unprecedented disruption and the world’s supply of oil and natural gas, the market hasn’t seen the full impact of that yet.”
Unfortunately, outside of forcing the issue with renewed military pressure, there doesn’t appear to be much light at the end of the tunnel for a fast-track to resumed negotiations, let alone an imminent negotiated settlement to resolve the conflict and reopen Hormuz. Therefore, the risk of realizing the “full impact” of those pending oil and gas shortages continues to rise by the day.
What’s worse, it appears that even if negotiations resume, a quick settlement isn’t likely. Confirming that pessimistic tone, Reuters on Thursday evening quoted Iranian Foreign Ministry spokesman Esmaeil Baghaei, “expecting to reach a result in a short time, regardless of who the mediator is, in my opinion, not very realistic.”
Given the frustrating ongoing stalemate, according to Reuters, on Thursday President Trump was briefed on “plans for a series of fresh military strikes to compel Iran to negotiate an end to the conflict.”
However, in response to those reported fresh threats of renewed U.S. strikes, Reuters quoted a senior official of Iran’s Revolutionary Guards as saying that any new U.S. attack on Iran, even if limited, would usher in “long and painful strikes” on U.S. regional positions. In addition, (referring to previous reports that Iran had, before the ceasefire, successfully fired drones and missiles at U.S. bases, infrastructure, and U.S.-linked companies in Gulf states) an Iranian Aerospace Force Commander Majid Mousavi was also quoted by Iranian media as saying, “We’ve seen what happened to your regional bases, we will see the same thing happen to your warships.”
So, in other words, no talks are happening; if there are talks, they won’t be swift; and if the U.S. wants to strike Iran in the hopes of further incentivizing talks, Iran will respond by targeting the U.S. Navy. Not surprisingly, nothing about any of that sounds particularly constructive to HAI’s ear.
Additionally, even if another round of strikes could hasten a resolution that reopens Hormuz, as HAI discussed last week, dwindling munitions stockpiles combined with multi-year replacement timelines means that the U.S. may ultimately be extremely reluctant to choose military escalation over the current blockade and operation “economic fury.”
Meanwhile, as we wait to see if the U.S. reengages with military force, Treasury Secretary Scott Bessent certainly seems like he’s now the point man for offensive operations in a war increasingly being fought on an economic battlefield.
Speaking on Fox News on Wednesday, Treasury Scott Bessent told Larry Kudlow that, “The largest bank in Iran collapsed. The central bank had to monetize the debt, and that created massive inflation.” Bessent added, “their currency is down about 60 or 70 percent versus the U.S. dollar… we are freezing those bank accounts for the Iranian People… same with all their villas in the south of France and all over the world. We are going to track them down.”
In HAI‘s view, just as the U.S. freezing Russian FX reserves following the start of the Ukraine war catalyzed a massive acceleration in the global official sector flight to gold, so too will this latest round of economic warfare incentivize further global de-dollarization efforts.
Every government on earth is watching and taking note. For a great many of them, de-dollarization isn’t just a preference for gold over dollars, it’s an expression of an existential national security imperative.
Now, over the past two months a popular narrative to explain gold’s recent sell-off has emerged: this war with Iran is fundamentally bearish for gold and has catalyzed official sector gold sales. HAI has vehemently disagreed with that narrative, and continues to do so.
As of this week, a new Bloomberg article titled, “Central Banks ‘Scoop Up a Load’ of Gold in Bumpy First Quarter” is pouring cold water on the argument that “Iran war is bearish gold.”
It’s true that some nations did pare gold holdings in the first quarter. Turkey, Russia and Azerbaijan joined a number of other smaller banks and sovereign wealth funds in shedding an estimated 115 tons over the period. According to Bloomberg, “each bank had its own motivation for selling: Turkey to shield its currency and economy from the effects of the war; Russia to meet a budget deficit; and in Azerbaijan’s case, to bring holdings back within permitted limits.” Nevertheless, those sales combined with the negative price action have raised concerns about institutions’ appetite for gold, and their interest in continuing a dedollarization trend that’s been a key driver of gold’s multi-year rally.
Well, on Wednesday, Bloomberg also reported that, even net of those sales, “Central banks added gold holdings at the fastest pace in more than a year in the first quarter, as a slump in prices encouraged a wave of buying that more than offset sales by a handful of institutions… Net official-sector purchases totaled 244 tons in the three months, up from 208 tons in the previous quarter, according to estimates from the World Gold Council.”
“‘It’s the first time in a while that we’ve seen a decent correction in gold,’ said John Reade, chief strategist at the London-based World Gold Council. ‘That has allowed central banks that might have been hanging back, waiting for exactly this opportunity, to come in and scoop up a load.’”
HAI agrees with the global central banks’ strategy of buying into gold price dips within a clear and powerfully fundamental-driven long-term up-trend, and also agrees with latest research from Deutsche Bank, which just this week concluded that the possibility of $8,000 gold is officially in play.
As Deutsche Bank put it this week:
In 1989, Francis Fukuyama argued that humanity had reached “the end of history.” In the years that followed, the US became the uncontested hegemon, global trade exploded in a US-defined liberal order, developed market central banks sold gold, while emerging markets accumulated vast amounts of US dollar FX reserves. We argue that the end of history has come to an end. The world is back in a superpower struggle; the US is retreating from free trade, alliances, and security provision; the Great Economic Moderation is behind us; and the dollar banking system has been weaponized. The ‘return of history’ has big implications for gold and the dollar…
We find it notable that the value of above-ground gold exceeded the total value of marketable US Treasury debt last year for the first time in 40 years. In other words, gold is now a bigger asset class than the world’s main safe asset…
The economic clout of China and the Global South in PPP-adjusted GDP already exceeds 50% of the world today, and a majority of global trade flow growth is happening down these corridors. Payment innovations in this part of the world should thus be paid heed. We note that…a BRICS currency of the future could well be backed in part by physical gold…
While EM central bank diversification into gold likely has much to do with preserving the value and accessibility of their foreign savings in a changing geopolitical climate, it may also…play a role in anchoring a monetary order that builds independence from the dollar.
Deutsche Bank concludes by saying, “The return of history is here,” and they can now see a future in which gold can “rise to $8,000 over the next five years.”
HAI would tweak a few of DB’s claims: 1) BRICS currency backed in part by physical gold misses the logic and elegance of local currency commodity trading with net gold settlement in a “gold-based” neutral reserve system, and 2) the shift towards gold isn’t one that “may also” anchor a monetary order that builds independence from the dollar; that’s it’s explicit point.) Furthermore, in HAI‘s view, $8,000 gold is better thought of as a base-case minimum, and the timeline on that $8,000 benchmark could well be closer to 1–2 years.
Nevertheless, HAI agrees that the “return of history” is indeed here. Deutsche Bank’s acknowledgment is another important step towards a wider Western institutional recognition of a new set of rules.
As HAI has said previously, we are witnessing the timeless truth Princess Leia spoke to the “Empire” in Star Wars: A new Hope when she said, “the more you tighten your grip, the more star systems will slip through your fingers.”
This is the reality of our late-stage weaponized dollar system. Not that the U.S. or the dollar system is evil, or that the U.S. is the “empire,” but that the more we try to weaponize the system to our own ends, the more we ensure the dollar reserve system’s ultimate demise.
In HAI‘s view, gold remains the biggest beneficiary of this generational global system change already well underway. For gold holders, the already established major trend is very much your friend. When the ongoing shorter-term technical correction abates, expect that dominant trend to reassert itself—with intensity.
Weekly performance: The S&P 500 was up 0.91%. Gold was off 2.04%, silver was down 0.39%, platinum was off 1.51%, and palladium gained 1.82%. The HUI gold miners index was down 7.58%. The IFRA iShares US Infrastructure ETF was up 2.09%. Energy commodities were volatile and higher on the week. WTI crude oil surged 8.54%, while natural gas launched by 10.55%. The CRB Commodity Index was up 3.78%. Copper was off 1.84%. The Dow Jones US Specialty Real Estate Investment Trust Index was up 1.38%. The Vanguard Utilities ETF was up 0.64%. The dollar index was off 0.33% to close the week at 98.21. The yield on the 10-yr U.S. Treasury was up 7 bps on the week, closing at 4.37%.
Have a wonderful weekend!
Morgan Lewis
Investment Strategist & Co-Portfolio Manager
MWM LLC
