Edwin Starr once sang a song containing the lyrics “War, what is it good for?”. As we all know, war is the most destructive, negative human characteristic that exists. Actually, I read a study a while ago noting that  chimpanzees will also invade and engage in war with neighboring groups of chimps for similar reasons as humans (acquisition of land). Today, I’d like to quote a couple of sources on the prospects of the Middle East war accelerating, and how that might impact oil and gold prices which can be effective hedges during times of  international conflict.

Oil and war.

The background:

“U.S. Defense Officials and Members of the Biden Administration have reportedly begun to understand in recent weeks that Negotiations have almost Totally Failed and that a Major Regional War in the Middle East may soon be Imminent, with several “Battle Plans” and Contingencies being Drawn-Up if this does occur; Secretary of State, Antony Blinken’s Visit to the Region this week is seen as a possible Final Attempt towards Peace.” – Open Source Intelligence Monitor

Shipping (supply) of oil may become more difficult in the current conflict. Usage of oil can increase in times of war.  Supply down/ demand up – economics 101. This can drive prices up.  Sorry Justin – No charging stations available for EV Tanks, fighter jets, navel destroyers and cargo ships, even by 2030.

WTIC 

Lets start with the oil chart for neartermed potential moves. Right now, we are seeing oil at major support. Moneyflow index (a reliable indication of tradable extremes in moneyflow momentum) looks to have tested an oversold level and is possibly hooking up. Force index (price direction, momentum and volume in one oscillator) is showing strength. And the good ol’ Rate of Change oscillator (I’ve adjusted it to a 240 weeks lookback period to signal only major moves) is hooking up from a near oversold level. FYI- The Brent crude chart, not shown, is similar.

Speaking of shipping…

Some of you will recall my video interview about about a year ago with market historian David Chapman.

Here’s a recent comment from David:

“As the chart of average shipping container rates shows, the costs have jumped over the past number of weeks,
thanks to the ongoing attacks in the Red Sea. North America freight shipping is rising as well, thanks to the
drought conditions in the Panama Canal and the Mississippi River. That leaves two of the most important
shipping routes in high doubt. For Red Sea shippers, a trip around Cape of Good Hope adds 13–15 extra days.
Calculate costs plus increased oil demand. Similarly, the route around the Strait of Magellan is not overly
viable, so to move things from New York to Asia they might instead also go around the Cape of Good Hope….None of this is to suggest that anything untoward is going to happen. However, it is important to understand
the importance and role of each of these major choke points and their potential impact on global trade and oil
prices in particular. Blockages could have serious economic fallout that could help plunge the world into a steep recession. An outbreak of war in, say, the Straits of Hormuz could see oil prices soar by 20% or more. It could send the world, particularly the West, into a steep recession. Yet, negotiations to end these conflicts seem remote.
David Chapman

Seeking alpha this morning (January 10th): “Shipping rates continue to rise steeply as vessels face long delays amid increasing Red Sea attacks by Yemen’s Houthi rebels. The average shipping cost for a 40-foot container has nearly doubled since the attacks began, according to Drewry’s World Container Index, with $200B in cargo estimated to have been diverted since early December. Late on Tuesday, U.S. and U.K. forces shot down the Houthis’ biggest attack yet, with Secretary of State Antony Blinken warning of consequences if they continue. Meanwhile, the U.N. Security Council will vote today on a resolution demanding an immediate halt to the Houthi assaults that have impeded global commerce.”

Shipping rates:

 

Gold

While oil can be stimulated by war, gold can also be perceived as a safe haven during times of war.  War can influence governments and investors alike to increase exposure to the asset. War can also keep inflation high, as countries increase spending  to fuel the war effort.

Here’s an excellent article by MFEA on gold patterns historically associated with wars. They note the following patterns after analyzing major historic wars:

Event Impact on Gold Prices
Outbreak of War Declined, then stabilized.
Increased Govt. Spending Gold prices rose to protect against inflation.
Global Economic Uncertainty Fluctuated with changing economic stability.
Post-War Recovery Gradually decreased due to better market conditions

Below is an historic gold chart that I put together using a chartstore.com chart. It highlights the major wars since WWI. Note gold’s action during those wars. Of note:

  • WW1 1914-18
  • WWII 1939-45
  • IRAQ/IRAN 1980-88
  • IRAQ/US 2003-9
  • 2022- ? UKRAIN/RUSSIA
  • ISRAEL / HAMAS 2023 – ?

Current gold chart.

Note the breakout from a 3 year lid around $2000.  Keep in mind that the breakout is relatively early and subject to potential failure. But if we look at the key indicators below the chart, we can see that money is indeed moving into the commodity. All is good so far – gold appears to be bullish. I noted on my last BNN show that I like gold as a mid-longer termed trade. We hold gold positions.

Conclusion

I think it makes sense from both a technical perspective, and an increasing potential for heightened war activities, to leg at least some of our capital into oil and gold.





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