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Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.
Rising geopolitical and inflation risks brought heightened volatility to markets this week.
Russia’s military incursion into Ukraine is being described as the worst attack on a European nation’s sovereignty since World War II.
In response, the Biden administration announced a new round of economic sanctions against Vladimir Putin’s government. The sanctions seek to economically isolate Russia and restrict its ability to market its products in the global economy.
One of Russia’s most important assets, besides its vast arsenal of nuclear weapons, is its oil and gas reserves. Sanctions on Russia’s energy industry threaten to constrict global supply and drive up prices consumers pay at the pump here in the United States.
Local News Report (California): President Biden has made it clear that sanctions on Russia could hurt the United States as well. Those potential sanctions may include targeting Russia's banking sector and other key industries. Russia is the third largest producer of oil worldwide, accounting for roughly 12% of global crude oil production. And 7% of us crude oil imports. Already, California's experiencing record high prices at the pump.
President Joe Biden: My administration is using every tool at our disposal to protect American businesses and consumers from rising prices at the pump. As I said last week, defending freedom will have cost for us as well and here at home.
White House Reporter: Americans should expect higher gasoline prices?
Jen Psaki (White House Press Secretary: Yeah. Energy prices. Exactly. That's what we want the American public to be aware is a possibility.
Oil futures spiked to well over $100 per barrel on Thursday morning. But by the close of the trading day, some of that panic buying gave way to selling.
Meanwhile, the stock market began to recover after initially trading much lower and threatening to take out significant support levels. Perhaps the Plunge Protection Team – euphemistically called the President’s Working Group on Capital Markets -- was mobilized as part of the White House’s response to Russia.
In any event, the sudden reversal of the fear trade on Thursday afternoon caused precious metals markets to give back much of their earlier gains.
As of this Friday recording, gold prices are now down 0.6% for the week to trade at $1,891 per ounce. Silver shows a weekly gain of about 5 cents of 0.2% to bring spot prices to $24.01 an ounce. Platinum is off 1.2% this week to trade at $1,068. And finally, palladium checks in at $2,386 an ounce, essentially unchanged now on what has been a very volatile trading week.
Russia possesses what is believed to be the world’s largest palladium stockpile. Its central bank has also been stocking up on gold in recent years as part of its efforts to de-dollarize and insulate itself from the impact of sanctions.
A big question now looms about whether Russia will align more closely with China. The Chinese Communist Party may have similar ambitions to bully around its neighbors, including Taiwan.
China’s economy is larger than Russia’s by orders of magnitude. For decades, it has supplied Americans with cheap manufactured goods while buying up piles of excess U.S. Treasury securities to fund America’s staggering budget shortfalls. As a result, China has helped keep consumer price inflation in America low – or at least lower than it otherwise would be.
Were that trading relationship to unwind, the impact on the U.S. economy would be far greater than what’s happening now with Russia.
Of course, it remains to be seen whether the fighting in Ukraine and retaliatory sanctions trigger a larger-scale war. Some worry the seizure of Ukraine is merely a first step in Putin’s plan to reconstitute the old Soviet Union. In a worst-case scenario, a nuclear standoff could ensue.
As no nation intends to physically prevent Putin’s takeover of Ukraine, the best-case scenario is simply that the latest provocations will fade from the news cycle. If geopolitical tensions simmer down, then risk premiums attached to energy and precious metals markets may also come down.
But gold and silver haven’t really seen an outsized move from the fear trade. Yes, they have rallied over the past few weeks. That was from relatively depressed levels, though. Looking at the big picture, silver remains depressed– still trading at less than half its former all-time high.
Investors shouldn’t expect major long-term trends in markets to be driven by Ukraine/Russia headlines. They should instead expect that relentless debt growth and currency creation will continue to drive inflation and exert pressure on markets.
Against that backdrop, paper assets are vulnerable. Bonds are guaranteed to lose value. The only question is how rapidly. The outlook for stocks, meanwhile, is uncertain. But periods of high inflation tend to exert downward pressure on price/earnings ratios – implying the Dow Jones Industrials may have much further to fall in real terms before it reaches fair value.
If price inflation and economic stagnation have legs, then the Dow can expected to lose significant value versus gold like it did in the stagflationary 1970s.
The Dow to gold ratio has been on a down swing so far in 2022. It’s not enough to establish that a secular trend is in force. But such trends can last for several years.
From 2001-2011, gold gained over 550%. During that same period, the Dow was essentially flat – a lost decade for stocks.
Investors can ensure that they don’t suffer a lost decade in a particular asset class by diversifying into alternatives.
Historically, bonds have been a viable place to park wealth during a bear market in stocks. But today bonds yield less in real terms than they have at any point in history. They don’t offer the opportunity to earn a positive after inflation return, making them a terrible long-term investment.
Alternative asset classes including precious metals do offer buyers the opportunity to gain from inflation. And there will likely be a lot more pain ahead on the inflation front.
Well, that will do it for this week. Be sure to check back next Friday for our next Weekly Market Wrap Podcast. Until then this has been Mike Gleason with Money Metals Exchange, thanks for listening and have a great weekend everybody.
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