Blanchard Index

Precious Metals

The U.S.-Israel war in Iran entered its third week, as stock market volatility surges and the price of oil has spiked more than 40% since the start of the war. Brent crude oil climbed to nearly $120/barrel. Gold is trading in a narrow range above $5,000 an ounce as investors monitor the inflationary impact from higher oil prices. The Mideast crisis is adding fresh inflationary risk into the economic outlook, which could mean fewer Federal Reserve rate cuts this year.

Oil remains a key market driver as traders monitor developments around the Strait of Hormuz, a critical transportation route for about 20% of the world’s oil tankers. Shipping has ground to a near standstill in the Strait of Hormuz. From an economic and market standpoint, the Iran War is quickly becoming an Energy Shock, which has the potential to slow economic growth and increase inflation—what economists call “stagflation.”

While gold has shifted into a sideways trade in recent days, the precious metal has gained more than 15% this year, and silver is up 14%.

Key Takeaway:

If the war with Iran drags on and concerns over stagflation increase, that will support fresh gold buying. Over the long-term, gold has proven to be a better store of value than the U.S. dollar. Investors turn to gold to hedge against currency devaluation, economic slowdowns and rising deficits. Historically, gold has performed exceptionally well during stagflation, outperforming both stocks and bonds. In the 1970’s as the U.S. suffered from stagflation, gold climbed from $35 an ounce in 1971 to over $800 an ounce in 1980. We could be entering another period similar to that.