I was planning to put out a thought piece today about why the US pint is a better measure than the English pint, but that will have to wait as I felt the need to comment on this week’s market action.
WTI Crude surged above $100, and Brent above $110. We are now above the levels reached when Donald Trump first started bombing Iran. We have a proper uptrend in place and oil stocks are looking good, bringing some respite to portfolios that are being battered elsewhere. The sub $60 days of January feel a long way away now and we are not going back there any time soon. Get used to $100 oil. It’s the new normal. But look: we got a textbook double bottom.
The old 2008 highs around $150 are back on the radar, with the Iran conflict no closer to resolution, supply chains disrupted and inventories being drained.
$150 oil - equivalent to maybe $200 today - was a major and often overlooked cause of the Global Financial Crisis, as I outlined here. Higher energy costs drain capital. Costs suddenly rise across every supply chain. Disposable income at the household level and margins at the corporate level get squeezed, and there is suddenly less capital available. Oil peaked at $147 in July 2008. The crash followed.
Higher energy prices together with higher interest rates make over-leveraged western economies extremely vulnerable. Higher rates, such as we are seeing in the government bond market, mean money costs more, while higher energy costs mean there is less of it available. Liquidity is drying up, risk is very much off and it feels like there are few places to hide.
Gold is now sitting right on support at $3,900 and, from a technical perspective, really needs to hold. But at present gold is not a hiding place. It will be, but for now it is vulnerable to liquidity drying up. I don’t feel that confident it will hold $3,900 (that might be a postive sign) even with central bank buying. If it doesn’t, the next stop is $3,500. I have highlighted the support zone in blue.
That is not a reason to sell physical by the way. If anything it is a reason to buy. In a liquidity squeeze everything gets sold, gold included. But when the inevitable print comes, it will go higher.
Silver is, among other things, a leveraged play on gold, but that works both ways. This week it has been hammered and it looks ugly as hell. $50 is the break point that goes all the way back to 1980 and 2011. It was the ceiling then; now it needs to be the floor. After that it’s $45 and $35. Do not underestimate the power of silver to decimate portfolios.
