Today one of the greats in the business noted that past oil bull markets have been very bullish for gold and silver, and that relationship will synchronize in the future.
Past Oil Bull Markets Have Been Bullish for Precious Metals
April 3 (King World News) – Jesse Colombo: Contrary to the recent narrative, soaring oil prices have not been bad for precious metals but have moved higher alongside them, as the 1970s and the 2000s show.
Since the Iran war began a month ago, precious metals have corrected after two years of explosive gains. One of the main reasons, as I recently explained, is that the spike in oil prices has pushed up inflation expectations, which in turn has reduced the odds of rate cuts this year and at times even raised expectations of rate hikes. Precious metals have pulled back as a result, as they are highly sensitive to interest rate expectations given that they do not generate yield.
In this report, however, I want to show that this “oil up, precious metals down” behavior is likely limited to the initial shock phase of the war, and that historically, secular bull markets in oil, meaning long term advances that unfold over roughly a decade, have coincided with secular bull markets in precious metals, as seen in the 1970s and the 2000s.
To start, let’s take a look at the chart of Brent crude oil, the international benchmark for crude oil. Since the start of the war on Iran a month ago, Brent crude has surged by approximately $37 per barrel, or 51%, and is now approximately $109 per barrel.
The surge in oil prices over the past month has driven inflation expectations higher, as measured by the 10-year breakeven inflation rate, a widely referenced indicator of expected inflation. It is calculated as the difference in yields between 10-year nominal Treasury bonds and 10-year Treasury Inflation-Protected Securities (TIPS), reflecting the market’s expected average annual inflation rate over the next decade.
Next is the chart of gold and silver, both of which have declined since the war began, in large part due to higher inflation expectations reducing the odds of near term rate cuts:
So now you understand the relationship between crude oil and precious metals, at least during the initial shock phase of the Iran war. Next, I want to show that historically, however, major surges in crude oil that unfold over extended periods, known as secular bull markets, have coincided with history’s most powerful secular bull markets in precious metals, namely the 1970s and the 2000s. Yes, I am aware that this flies in the face of recent price action since the war began, which is precisely why it is important to be aware of.
The reason I am presenting this information, and why it intrigues me, is my view that precious metals, including mining stocks, entered a new secular bull market just two years ago, and I expect it to last at least a full decade based on historical patterns. I see gold and silver prices rising significantly from here, with gold exceeding $15,000 and silver surpassing $500 over the course of this bull market. I recommend reading my recent reports on the secular bull market in gold and silver to learn more about this thesis.
The implication is that even if crude oil enters a new long term bull market kicked off by the war with Iran and the destruction of energy infrastructure in the region, that need not be the death knell for the precious metals bull market. On the contrary, it is likely further confirmation, based on historical patterns, that precious metals are in a long term bull market that is still in the early stages, as we will see in the next two examples.
The first example is the 1970s, the largest commodities supercycle, or secular bull market, in modern history, during which virtually every commodity soared, including oil and precious metals. The chart below compares the prices of oil, gold, and silver, and shows clearly that they rose in tandem throughout that tumultuous decade, disproving the notion that high oil prices are bad for precious metals.
Also take note that there were two major oil crises, one in 1973 and another in 1979, both of which acted as powerful catalysts for the oil bull market. Each was driven by geopolitical turmoil in the Middle East, with the first triggered by the Arab oil embargo during the Yom Kippur War and the second by the Iranian Revolution, which disrupted the global oil supply and sent prices sharply higher. Note the parallels between those energy crises and the current war with Iran.
KING WORLD NEWS NOTE: Colombo’s Chart Illustrates Gold, Silver & Oil Skyrocketed Together In Both 1970s Oil Crises
The next example is the 2000s, the largest commodities supercycle since the 1970s, and as the chart shows, oil, gold, and silver all soared together, again contradicting the notion that high oil prices are bad for precious metals.
Also note that the 2000s oil bull market was kicked off by geopolitical crises in the Middle East, beginning with the September 11 terrorist attacks and the ensuing War on Terror, followed by the U.S. invasion of Iraq in March 2003, which disrupted the global oil supply and contributed to rising prices, and consider the parallels between that and the current war with Iran.
As we have seen, the largest precious metals bull markets in modern history, the 1970s and the 2000s, occurred alongside the largest crude oil bull markets, and this is no coincidence but a defining feature of commodities supercycles, when most commodities rise together from low valuations.
While, at least in the early stages of the current Iran war, high oil prices have been bearish for precious metals, this is likely due to the initial shock phase, but I expect precious metals to soon resume their upward trajectory, which I expect to last at least a decade and is still only about two years in.
I hope you found this brief report encouraging, as there is a great deal of fearmongering right now, with many prominent commentators claiming that the nascent precious metals bull market has already met its demise and is basically all downhill from here, a view I strongly disagree with.
In an upcoming report, I plan to assess oil prices against various benchmarks to gauge its valuation and how much further it could rise simply by returning to historical norms, so stay tuned as I believe you’ll find it interesting.
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