The recent surge in oil prices is poised to boost global assets as crude-producing states deploy replenished stashes of petrodollars, according to a growing chorus of analysts. It’s the potential reversal of part of the global "quantitative tightening" that was said to have occurred as oil prices dropped precipitously, and could amount to an extra shot of liquidity at a time when central banks are beginning to normalize monetary policy.
"The increase in oil prices is generating a shift in flows and incomes across the world, effectively reversing the previous big shift seen between 2014 and 2016," wrote JPMorgan Chase & Co. analysts led by Nikolaos Panigirtzoglou. They estimate that energy producers stretching from the Middle East to Norway saw their oil-related revenues plunge from $1.6 trillion in 2014 -- when crude reached $115/bbl -- to less than $800 billion in 2016, when it fell to $27.
The drop in oil-related proceeds roiled global markets by cutting off producers’ demand for imported goods and curtailing the ability of big sovereign wealth funds and central banks to buy foreign assets. Those funds and FX reserve managers may have purchased $160 billion less in public stocks and $80 billion less of bonds as a result of the slump in crude during the two year-period, JPMorgan said in research published on April 20. – World Oil
With central banks having to switch over from Quantitative Easing to Quantitative Tightening due to the fact that half a decade of lower oil prices have forced them to have to print tens of trillions of dollars to sustain a modicum of liquidity to stave off deflation, markets are cheering the return of higher oil while at the same time it becomes a Damocles Sword over consumers who are fully tapped out, and in more debt today than during the 2008 financial crisis.
While it is a given that price suppression and manipulation in the gold and silver markets is a fact of life, it is also correct to say that central and bullion banks cannot keep prices down forever. And most often the biggest catalyst for gold moving higher is a rush by investors into the metal as a safe haven asset.
Which is why today it is more important to watch fundamental indicators in the markets more than it is to study technical trends. And with the 10 year Treasury closing above 3% yesterday, and oil prices starting to break out of a six year bear market, the return of inflation appears to be very real, and is historically the launching pad for investors to suddenly rediscover gold as a primary safe haven.
When gold prices are high, major mining companies scramble for new discoveries.
Eventually when they start mining those deposits, though, the supply of gold increases, pushing prices down.
As the price falls, the miners’ profit margins fall, which causes investors to lose interest and the miners to reduce production.
This causes supply to fall, prices to increase, and the cycle starts all over again.
In a way it’s almost comical. And that brings us to today. Well, technically yesterday.
We’ve been seeing for more than a year that interest rates have been rising.
Yesterday afternoon the yield on the 10-year US Treasury note surpassed 3% for the first time since 2014.
And oil prices have been rising steadily as well.
Financial markets don’t like this combination– it means that inflation is coming. Big time. And stocks plummeted worldwide as a result.
Now, that immediate reaction was probably a bit too panicky.
But the deep concern that inflation is coming (or has already arrived) is completely valid.
Inflation is a HUGE problem. And the traditional hedge in times of inflation is GOLD.
But remember– new gold discoveries have collapsed in the past 15 years.
And, as Lassonde said above, there are few discoveries on the horizon to make up the difference. – Sovereign Man