It’s Gold’s Turn To Shine
Everything is pointing towards gold. When you consider inflation, problems with supply chains, and the tumultuous geopolitical landscape, it’s only logical that gold prices will increase. Let’s discuss why.
No one knows what the future holds, but we can be fairly certain of some things. Inflation will not be a transitory issue. International supply chains will not recover quickly. And the conflict in Ukraine will not be over anytime soon.
Just taking the last point – even if the Ukraine conflict did end in the near future, a ceasefire will not stop the flow of geopolitical consequences caused by the onset of the war. These are likely to exert major pressure on the geopolitical landscape for years to come – perhaps even decades.
At best, the Ukrainian conflict will see Putin exert de facto control over much of eastern Ukraine. That is if he doesn’t reach his aim of annexing Ukraine outright. Either way, Ukraine has little to no hope of achieving membership in the EU or NATO in the near future, if at all.
The conflict has also caused a rift in the West, with Germany and France taking an entirely different stance than the United Kingdom and the United States on the issues of Russian trade and energy. This rift could cause permanent damage to the previously-established alliance between these Western countries.
As serious as it is, the conflict in Ukraine is not the only major global security problem at the moment.
Global Tensions are Simmering
China’s presence in the South China Sea and the Taiwan Strait has people on high alert.
Iran has made its plans known to create a nuclear device that can fit on a missile and is working on its plans for uranium enrichment projects. Iran’s intentions are being renegotiated in the new JCPOA (Joint Comprehensive Plan of Action) which is currently in its final stages of preparation.
North Korea has been working on mid-range missiles, and there is speculation that they are in the process of getting ready to test an ICBM (intercontinental ballistic missile) that could potentially reach the western side of the United States, as well as Alaska, Hawaii, and Guam.
These countries are not the only ones of concern. Geopolitical tensions also currently exist in Ethiopia, Sudan, Venezuela, Lebanon, and Syria.
As if these issues weren’t enough, there is also the matter of geo-economic problems to consider.
The Chains of Global Supply Are Already Being Damaged By The War In Eastern Europe
Even prior to the commencement of the Ukrainian war there was a crisis in the global supply chain, and this will only continue to worsen.
The pandemic has caused chaos in supply chains as both buyer and seller facilities in ports, plants, trucking, shipping, distribution centers, and warehouses closed temporarily and at different times, depending on where the outbreaks were. The result of this chaos was backlogs and bottlenecks.
And now we have the war in Ukraine with retaliation, severe sanctions, and enormous disruptions from the war itself.
Global Supply Chains Have Already Been Damaged By The War.
Volkswagen and BMW, for example, have both shut down their production lines due to their inability to source a simple cable wiring harness part from their supplier in Ukraine. In explanation: Sometimes the majority of an automobile can be assembled with the delayed part being installed towards the end of the process; however, that doesn’t apply to wiring harnesses. This particular part must be installed at the beginning of the manufacturing process, which means the assembly line is forced to halt at almost the start of production.
While this is just one example, it’s certainly not the only one. Manufacturers of products worldwide are suffering due to supply chains with their origin in Ukraine. Perhaps wheat exports and agriculture have taken the hardest hits.
Can Ukraine Keep Up Its Reputation As The Breadbasket Of Europe?
With the planting season due to begin soon in Ukraine, the inability to obtain much-needed fertilizer is going to have a devastating consequence. Crop shortages will dramatically affect global supplies next fall when harvest time arrives.
Will Ukraine be able to maintain its reputation as the Breadbasket of Europe? Ukraine and Russia supply about 25% of the world’s wheat supply and 20% of the world’s corn supply, so the immediate future of these supplies looks grim, to say the least.
This lack of supply is likely to cause serious repercussions because the majority of the world’s grain is not used for human consumption – it’s used for feeding the animals we eat. That juicy hamburger you enjoy probably comes from a cow that consumed wheat that was more than likely produced in Ukraine.
Let’s look at the impact on strategic metals and semiconductors: Boeing obtains 35% of its titanium from Russia and Airbus obtains 50% of its titanium from Russia. Together, Ukraine and Russia control 30% of the world’s titanium output, which means there won’t be any new airplanes in the foreseeable future.
The Case For Semiconductors
In the meantime, shipments of semiconductors to Russia have halted. Stopping the shipment of semiconductors to Russia is damaging their economy, that’s true, but how are semiconductors produced? You use silicon chips etched with lasers. How are lasers powered? They’re powered with processed neon gas. 65% of the world’s processed neon gas comes from just one company in Odesa in Ukraine.
Putin retaliated at having Russia’s semiconductors cut off by cutting off neon gas – therefore, there are no conductors. This resulted in the shut-down of most of the world’s semiconductor industry. If you stop for a moment to think about this, there are more than 1,400 semiconductors in just one car!
It takes decades to build a supply chain, but when sanctions are imposed (as they currently are in Russia) it can take just a few weeks to destroy.
Out Of The Frying Pan…..
While Russia’s exports won’t cease altogether, instead of heading to the United States and Europe they’re now being re-routed to India, China, and the Middle East. The ultimate result will be longer lead times, higher costs, and ongoing, lengthy shortages.
Keeping in mind that inflation is not ‘transitory’ or temporary, when oil, strategic metals, natural gas, and agricultural export prices spike, they don’t automatically retreat unless a major event occurs, like a global depression.
So, that leaves us with the choice of a new great depression or permanently higher prices. It really doesn’t matter which you choose because while both scenarios are terrible for the world’s economy, they’re good for gold.
Things are definitely looking up for gold!
Why is inflation good for gold? Because inflation typically runs ahead of hikes in interest rates. Yes, interest rates will eventually catch up; however, higher inflation with lagging hikes in rates for the first couple of years means that real rates are going negative.
The perfect condition for increases in gold prices!
Good For Gold!
Contrary to most investors’ expectations, a serious recession (or even a depression) is also great for gold. During the Great Depression, gold prices increased by almost 75%, from $20.67 to $35.00 per ounce. To defeat the rampant inflation, the government created a dollar devaluation to promote inflation in all commodities.
Knowing this, gold investors should prepare themselves for what’s often referred to as ‘$100 days’.
At today’s price levels for gold, making a large profit gets easier with each passing day. And this is why: Let’s say the gold you own increases in price by $100 per ounce, so you make $100 per ounce. Every gain of $100 per ounce is simpler than the previous one because the gain is a lower proportion from a greater denominator.
If the price of gold is $1,000 per ounce and it increases by $100 per ounce, the gain is 10%. However, if the price of gold is $2,000 per ounce and it increases by $100 per ounce, the gain is 5%.
When It Comes To Gold, The Time To Buy Is Now!
Let’s now carry this logic forward. If the price of gold is $3,000 per ounce and it increases by $100 per ounce, the gain is 3.3%. The increases are easier because each one represents a smaller percentage of the new base price.
But the result is still the same – you still make $100 per ounce.
This process is just starting, which is why it’s important to buy gold right now. We’ll be seeing gains of $100 per ounce every week, and then we’ll start seeing them on a daily basis. With gold at $5,000 per ounce, a gain of $100 per ounce is a gain of 2%. This is almost typical daily volatility. At $5,000 per ounce, a $100 per ounce gain is a 2% gain, which is almost normal daily volatility.
As you can see, buying gold sooner than later will lead to you enjoying those $100 days. And if you own 100 ounces, you’ll get to enjoy $10,000 days!