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Attacks in Hormuz: Gold a Clearer Winner than Oil

Commentaries & Views

The attacks on two Japan-bound tankers leaving the Strait of Hormuz this morning are the talk of the day. Oil prices shot up more than 3% on the news—as did gold and the US dollar—as one would expect.

So is it time to speculate on oil?

Not for me—not yet.

Oil has already given back about half of this morning’s surge, and the day ain’t done yet.

I don’t think this is because investors are dismissing the threat to this vital chokepoint in the global flow of oil. Gold and the USD remain near their intraday highs, showing continuing concern.

Rather, I suspect it’s due to the projection of declining oil demand that OPEC issued today. Open warfare closing the Strait of Hormuz would likely set flame to much of the Middle East. That’s an outcome so extreme that markets won’t price it in until it’s actually happening. So, despite the scare, most investors expect the Middle East to carry on as it has for years. In this setting, the OPEC + Russia production cuts may not be enough to offset lower demand caused by the trade war and the decelerating global economy. And I doubt US shale producers are going to cut production.

We could see a renewed oil glut and much lower oil prices soon.

An interesting aspect of this story is that the US again says Iran is to blame, as it did after last month’s attacks. Despite the US saying it has intel to support its claims, the international community seems reluctant to believe the claims. I wonder if this could be an unintended consequence of the US’s recent disruption of longstanding treaties and alliances.

Or maybe it’s just that, like me, they can’t believe Iran’s leaders would be stupid enough to start a war nobody would really win. It would be easier to believe that it’s Iran’s enemies seeking to frame Iran.

But what if the culprits don’t really want a war? What if all they want is to slow the flow of oil through the Strait of Hormuz, rather than stop it? If that resulted in higher prices, it would benefit any oil-producing country—even those not in the region. Such would be a dangerous game—one that could easily spin out of control—but I wouldn’t put it beyond some of the egomaniacs calling the shots on the global stage today.

I can’t say what the truth of the matter is, and we may never know.

What I can say is that while last month’s attacks were an exceptional event—an outlier—today’s attacks make for an emerging pattern.

If the pattern continues, with or without escalation to open warfare, it will mean higher oil prices. Such a trend would likely be long-lived, and I would consider speculating in the space if it plays out that way.

Meanwhile, it was good to see gold doing its job as a safe haven today. That’ always encouraging, but it’s especially important when the dollar rises at the same time. It’s proof that during times of elevated systemic risk, gold is not just another dollar-denominated commodity, like copper or coffee. Gold is physical wealth. It’s an asset on which one can go long, for which there’s no short, no counterparty risk. Gold is money.

Oddly enough, while today’s developments leave me uncertain about oil in the near term, they are very bullish for gold. This dangerous pattern of attacks on oil shipping is yet one more push for gold to break out of its six-year trading range.

I can’t promise that, but the odds have just increased significantly.

And I’m glad to have a portfolio of stocks poised to benefit in The Independent Speculator.

Caveat emptor,

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