Oil is next years Gold.
It is much easier to predict the past than the future, so you will have to forgive me if I am wrong about the following.
Oil is next years Gold.
The world’s governments are energetically baking in lots of inflation in the future.
Inflation versus deflation is the critical market call at the foundation of any investment strategy going forwards, so if you believe in deflatyion you are likely to loads up on a very different set of instruments. If you are a deflationist then the only thing you really need to own is cash, because everything else is going to spiral down in price.
Deflation suggests to me that governments will look at the current catastrophe and suck their teeth and say, ‘sorry folks you’ve got to grind yourselves out of this mess, by the way we need more tax because we just cant have these big deficits. Sorry about the cutback but we can go around doling money out, it doesn’t grow on trees you know.”
Nope that’s not going to happen. It is not happening. The opposite is happening.
Well that print-o-mania is not going to create deflation and lets face it, it is better to eat a $100 loaf of bread and drink a $200 can of beer than be crucified on a cross of Gold. But inflation is unlikely to be that bad. However, it will be higher than most people in Europe and the US have experienced in their Generation X lives.
The market is currently quite convinced inflation is coming which is why it is pushing Gold to new highs and you don’t have to be a slavering Gold bug to see $3500 an ounce. Likewise, Bitcoin grinds through $10,000 to $12,000 without a murmur and it doesn’t take a massive belief in Crypto to see it can head through $20,000 in the next 12 months.
All this is driven by more and more people seeing inflation as inevitasble.
Lets keep it simple,. Those government folks are now talking in trillions of dollars. Gone are the days talk of billions was the might max of dollar economics. Before the current crisis for the necessity of a financial unit in trillions to come up, you had to look to Turkey and Zimbabwe or countries where currencies had already been vigorously debased in the call of economic expediency.
So ther market is flashing confirmation of the inflation call and I am in that camp. While deflation is possible, inflation is probably.
So if the take that as the base case, then commodities will go up in the coming years.
First is Gold and we are riding that right now.
Next is oil.
Then comes base metals and soft commodities.
The next key is timing. Timing is hard and if you crack the code of ‘what next,’ it is harder still to get timing right because when the future seems obvious it feels likely to unwind in an accelerated Hollywood time scale, which it never does. These developments will take time and perhaps a few years.
If inflation is coming it will be oil that ramps next but that move will likely be mid next year.
So the market play will be to keep tabs on oil and if it starts to wander up, then the trade is to jump on big oil companies. They are low. Look out for developing moves with no apparent narrative, as they are ones caused by the interlocking nature of all markets. Silent trends causes by silent, ambient developments as early warnings that can be easily missed and they will herald inflation and the long term moves worth catching early.
For the risk hungry there is plenty of future and option Russian roulette to play, but you the investor, now is the time to collect up the best oil plays to get on to a watch list and stake out this what if till the moment you are sure its game on.
Oil is inverse money. When money falls in value, oil must rise in price because energy is the core input of economics and capitalism, one of the reasons it is the focal enemy of the left wing.
But the luxury of expensive energy will have to go on hold for a few years as the aftermath of the Covid response leaves Maslow’s pyramid decapitated.
Oil is going to go up at least as much as money is going to go down and that looks likely to be a lot.
… and that’s if the governments of the world play their weak hands with great finesse. It they don’t then these economic moves are going to be a lot bigger and badder than the markets are prepared for.