Oil Production Back to Pre-War Levels

Oil exports in the Middle East have reached 98% of their pre-war levels. For a war that has so fundamentally challenged the traditional oil supply chain, this is an incredible achievement. With oil coming out of the Middle East at the same rate that it did before the war, it is only a matter of time before the price of oil comes down. Fundamental tensions have grown in the region, but oil will decrease in price unless some unexpected and fundamental shock happens. These changes interact with gold prices in some interesting and unexpected ways. The growing strength of the dollar even in times of geopolitical tension means that there will be slightly diminished retail demand for gold. The long-term geopolitical effect of the Iran war is yet to be seen, but signs point to greater international stabilization, which could continue to bolster gold prices. With oil prices decreasing the cost of almost every input and consumers heavily weighing the price of gas in their consumption decisions, investor sentiment could become even more speculative and euphoric, historically leading people away from gold.

The Fed’s unpopular decision to raise rates along with the greater demand for US dollars enabled by higher oil output will exert a downward pressure on gold price. While raising rates might shift consumers away from equities, it often pushes them towards cash and strengthens the dollar through a number of means. Raising rates decreases the probability of inflation and also increases the value of the dollar. Foreigners increase their allocation of dollars and US citizens feel less need to turn their dollars into other forms of investment. Higher rates can’t stop inflation, but it can certainly slow it. The open secret of the Fed’s lack of independence from the court of public opinion makes rate hikes far worse than they should be. We continually exchange our future stability for present returns. Oil transactions are primarily done in US dollars, so a higher volume of oil transactions also increases the use value of the dollar. Gold has potential to unseat the dollar in oil transactions as geopolitical tensions continue to escalate, but currently the increase in oil transaction volume will most likely decrease the price of gold.…