–It’s a currency crisis, alright. Only it also looks like a bull market in commodities. Which can cause an uninformed investor to think the stock market is telling him everything is going along swimmingly. In fact, the whole glue that’s held the world together geopolitically for the last 50 years—the petrodollar standard—is coming unstuck.
–The headlines say the stock market’s woes are based on “Libya unrest.” But that is a superficial reading of events. It’s true people are now realising if there’s a protracted civil war in Libya that damages oil infrastructure…there’s some short-term pain. But Libya produces only 1.6 million barrels of oil per day.
–The bigger worry—which no one wants to discuss too loudly—is the whole region has entered a long period of low-level chaos. All hell is breaking loose, but in slow motion. That kind of political instability in the world’s biggest oil kitchen is a nightmare. It means big oil consumers like China and the US lose their energy security…or will have to find it somewhere else.
–The energy aspect of the story—where can you get secure supplies of fuel for your economy—is already creating movement in the share prices of smaller oil and gas companies. This is exactly what happened in 2008. Once oil got over $100 a barrel it made a lot of other conventional and unconventional energy projects economic.
–Of course last time around, it turned out the oil price rise was driven by speculators. When the credit crunch hit and the free money got more expensive, traders deleveraged and the oil price crashed. It’s possible something similar could happen today, although when you add the element of political turmoil in the Middle East, a crash seems a lot less likely.
–A lot more likely is that the higher oil price scares the crap out of central bankers and politicians. They will try to jawbone the price down by talking about higher interest rates, the end of QEII, and exploring for more oil. That might work for a bit. But it won’t solve any of the underlying problems in the Middle East (the unhappy relationship between people and their rulers).
–This means there’s a serious chance for a re-rating on smaller energy shares that have viable projects at a higher oil price. The projects we have in mind (and have written about in the Australian Wealth Gameplan) are mostly conventional and unconventional gas projects, although you could include nuclear. The name of the resource game now is to geographically diversify your supply of energy while you still can.
–And speaking of diversification, the gold and silver markets are telling us that the dollar and the euro are lousy stores of value. Silver hit another 31-year high. The May futures touched $36.11. Gold closed off its highs too. But both reacted well when the dollar index fell.
–Also, in case you missed it, Moody’s downgraded Greece’s sovereign credit rating by three notches. This shouldn’t surprise anyone. But it did remind some people, apparently, that Europe’s banks are stuffed to the gills with government bonds…and many European governments are so far down the debt hole, the only way out is default or restructuring.
–All in all, it was a rousing day for tangible assets and rout of a day for paper money. This leads us to believe gold is about to fall by $50 and oil by $10. You can never guess why. But asset prices don’t go up in a straight line, even in long-term bull markets. Somebody putting a bullet in Gadaffi’s head would probably trigger a big market correction in precious metals and oil.
–However this is the nature of the dangerous game being played by the Fed and the bankers. They have unleashed inflation on the world, with all its unpredictable and undesirable consequences. It can’t be easily put back in the box. There may be a tipping point at which gold and silver and oil go bananas. And we may be getting closer to it every day.
For Markets and Money