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Friday October 20, 2023
Fifty years ago, and nearly to the day of last week's Hamas attack, October
6, 1973, a surprise attack on Israel sparked what became known as the Yom
Kippur War. What soon followed was the Arab Oil Embargo, where over a
period of a few months, oil prices tripled.
Shortly after the attack, markets topped on October 29, 1973 and by
December 1973 the Dow had fallen over 21%. A severe stagflationary
recession also followed, and gold more than doubled over the next several
months.
The U.S. can ill afford to fund three wars at once as the federal budget
deficit—spending in excess of revenue—is already estimated to hit $1.7
trillion in fiscal 2023 and stay between $2 trillion to $3.5 trillion in
the next three fiscal years. In fact, since the debt ceiling was suspended
in June, U.S. debt is rising at $40 billion per day. And with the Federal
Reserve on the brink of a major potential pivot of their exceedingly
restrictive monetary policy, the U.S. will add $1 trillion in Federal debt
every 45 days at the current pace.
After a waterfall decline into the first week of October, the gold price
has been on an unstoppable move higher when war fears entered the
marketplace last week. Despite the U.S. 10-year bond yield rising to 5%,
the safe-haven metal has risen from $1825 just two weeks ago to move closer
to the key $2000 level as I type this column – notching up an impressive
gain of 9%, so far this month.
The gold move increased dramatically last Friday, when Gold Futures
experienced a $58 advance - the largest daily move in seven years. The day
began with fears of Israel appearing set to invade Gaza, followed by a
significantly weaker than expected U.S. Consumer Sentiment Index reading
pointing to the growing risk of stagflation. As consumer sentiment
continues to drop, inflation expectations are rising with the price of oil.
Crude prices have risen since the Oct. 7 attack by Hamas on southern Israel
on fears that if Iran enters the conflict, the U.S. could increase
enforcement of sanctions that would curb exports and further tighten global
supplies.
With both macroeconomic and geopolitical tailwinds now working in gold's
favor, its explosive move higher continued this week. Conflicts in the
Middle East have sent shockwaves through the global economy in the past, as
the region is a crucial supplier of Energies and Natural Resources as well
as a key shipping passageway.
With the Middle East home to a third of global Crude Oil supply, escalating
tensions could take millions of barrels off the market during a very critical
time when oil supplies have already been depleted by months of sharp
production cuts by Saudi Arabia and Russia.
Fifty years ago, and nearly to the day of last week's Hamas attack, October
6, 1973, a surprise attack on Israel sparked what became known as the Yom
Kippur War. What soon followed was the Arab Oil Embargo, where over a
period of a few months, oil prices tripled.
Shortly after the attack, markets topped on October 29, 1973 and by
December 1973 the Dow had fallen over 21%. A severe stagflationary
recession also followed, and gold more than doubled over the next several
months.
This week Brent Crude Oil prices moved closer to $100 per barrel on fears
of a widening war that might bring in Iran, after the country publicly
threatened America a day before President Joe Biden was set to arrive in
Israel.
Ayatollah Ali Khamenei’s adviser, Mohammad-Javad Larijani of the Axis of
Resistance, issued a warning to America that aiding Israel “would be a
strategic mistake” and would make it a “legitimate target for the
resistance fighters in the entire region.” He ominously uttered that “the
war will not be limited to Gaza” and said “in the near future, America’s
presence in Syria and Iraq will be very costly for them.”
Meanwhile, European gas prices have already notched up a stunning gain of
over 40%, the largest weekly gain on record. Iran’s foreign minister,
Hossein Amirabdollahian on Wednesday called for members of the Organization
of Islamic Cooperation (OIC) to stop selling oil to Israel and expel its
ambassadors, hinting of a coming oil embargo ala 1973.
With growing fears of an escalation of war in the Middle East, debt is a
ticking time bomb waiting to happen as the Biden Administration considers a
supplemental request of about $100 billion that would include defense aid
for Israel, Ukraine and Taiwan.
The U.S. can ill afford to fund three wars at once as the federal budget
deficit—spending in excess of revenue—is already estimated to hit $1.7
trillion in fiscal 2023 and stay between $2 trillion to $3.5 trillion in
the next three fiscal years. In fact, since the debt ceiling was suspended
in June, U.S. debt is rising at $40 billion per day. And with the Federal
Reserve on the brink of a major potential pivot of their exceedingly
restrictive monetary policy, the U.S. will add $1 trillion in Federal debt
every 45 days at the current pace.
October 1973 was a major turning-point month in the marketplace, while the
eerie similarities fifty years later are piling up. In 1973 it was U.S.
debt from the Vietnam War, the Yom Kippur War, the Watergate crisis after
Nixon took the U.S. off the gold standard, and then the Arab oil embargo
that lit a stagflationary fire under the gold price.
Today, will it be the combination of the Hamas attack, ongoing war in Ukraine,
the growing divide between the left and right in the U.S., and rising
global debt in the face of exponentially rising interest rates threatening
to implode the monetary system to finally position gold for a breakout
above $2100?
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