April 7, 2024

QuickTakes

Market Call:

$100 Oil, $3000 Gold?

Will the current decade turn out to be like the 1920s, 1970s, or 1990s? We are still assigning subjective probabilities of 60% to the Roaring 2020s (like the 1920s), 20% to a second peak in inflation (as occurred during the 1970s), and 20% to a bout of irrational exuberance (like the late 1990s).

We might have to increase the odds of a 1970s-like scenario if the price of oil continues to rise. Our very good friend Steve Soukup posted an April 6 article titled "Saudi Arabia and the Tale of Two Presidents." You should read it. The basic thesis is that the Saudis might like to see President Joe Biden lose to Donald Trump. So they might do whatever they can to boost the price of oil before the November election. Both the Saudis and the Russians started reducing their output last summer (chart).

The price of oil also has been rising on mounting geopolitical risks resulting from the escalating wars between Ukraine and Russia and between Israel and Hamas (chart). Iran reportedly has put its military forces on “full high alert,” as it vows revenge for an alleged Israeli strike on Monday that killed a top Iranian commander in Syria and several other Islamic Revolutionary Guard Corps members. Israel's defense minister said on Sunday that the country was ready to handle any scenario after Iran threatened to retaliate. A direct confrontation between Israel and Iran would rapidly boost the price of a barrel of Brent crude oil over $100.

Meanwhile, the price of gold is soaring in new high territory (chart). Another wage-price spiral attributable to rising oil prices would be very reminiscent of the Great Inflation of the 1970s, when the price of gold soared. In this scenario, $3,000-$3,500 per ounce would be a realistic price target for gold through 2025.

The price of silver is also moving to the upside after breaking out of a long-term consolidation pattern (chart).

These developments suggest that the bond and stock markets could experience more turbulence in coming weeks. We continue to recommend overweighting the S&P 500 Energy sector. We would also add to precious metals positions under the circumstances. Taking some profits in other positions might be a good idea too.

We asked Michael Brush for an update on insider activity: "Insider buying of stocks continues to remain exceptionally light relative to selling, confirming an ongoing cautious stance towards stocks. Selling has been particularly strong relative to buying in Nasdaq-listed stocks and among Consumer Discretionary, Financials, and Industrials." Thanks, Michael!

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