By EXANTE. Originally published at ValueWalk.
Below are the latest thoughts on inflation, gold, crude oil, energy prices and the situation in Ukraine from WealthTech EXANTE’s senior analyst, Victor Argonov.
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Ukraine
All the focus remains on the Ukraine conflict, which is continuing to trigger major moves in various asset prices. Tensions continue to rise between Russia and the West, with the latest sanctions being that the US will close its airspace to Russian airlines and Biden calling Putin a “dictator.” Biden also promised to get inflation under control, which would be his “top priority.” But he’s going to find it difficult with energy prices, wheat and other grains all soaring.
Inflation And Soaring Energy Prices
Soaring energy prices are providing significant headwinds for developed economies, which could potentially trigger a recession. In fact, Eurozone inflation has hit a new record high. Annual CPI climbed to 5.8% in January, accelerating from 5.1% recorded in December. With inflation soaring and economic growth at a standstill, this is stoking stagflation fears. This is what the markets fear given the sharp rally in benchmark government bonds, gold and other haven assets we have seen of late.
Gold
I reckon gold is going to rise much further from here, even if the Fed goes ahead with its interest rate hikes as planned this year. There is simply too much inflation in the world to justify shorting gold. Real yields have fallen sharply with both inflation expectations and bond prices rising in the last few days. Consequently, there is a good possibility we will see the yellow metal climb above $2,000 in the not-too-distant future. And if it gets to $2000, why stop there?
Crude Oil
The key question is whether oil prices will come back down. With Brent surging past the $110 handle, this clearly indicates that investors are worried that the unthinkable might happen: Import ban on Russian oil and gas by western countries, or Russia slashing its energy exports to Europe in retaliation to the sanctions. The prospects of interruptions in supplies from Ukraine are also real, due to the conflict there. On top of this, there are reports that some refiners are boycotting Russian barrels. Beyond the current drivers, the fact that there hasn’t been much progress in Iran’s nuclear talks has not helped the cause either. But if eventually there is an agreement, then this will probably trigger a sell-off in inflated oil prices.
OPEC
The focus for crude oil traders is momentarily going to shift to the OPEC meeting later today. The cartel and its allies are loving these high oil prices. Despites the Ukraine situation, they have so far resisted calls to raise output more significantly, partly because some members have struggled to even comply with their own targets amid outages and lack of investment. So, at Wednesday’s meeting, the OPEC+ is seen sticking to their existing policy of raising oil output only gradually to the tune of 400,000 barrels per day every month. This decision is likely to keep oil prices supported around their current levels. But in the unlikely event the OPEC+ surprises with a larger cut, then this will take the market by surprise and potentially lead to a sharp drop in prices.
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