Gold Rise and Printing Energy!

European government officials have announced plans to counter a lack of Russian natural gas by printing/providing more currency. First, there was a problem with turbine maintenance that slowed the transfer of Russian natural gas into Europe. Then there was a supposed oil leak preventing normal pipeline operations. But on Monday, Russia announced they would suspend natural gas transfers until Western sanctions were lifted. Some have speculated whether this was the real reason for pipeline disruptions since sanctions related to the Russian invasion of Ukraine began over six months ago. Ironically, the impacts of sanctions have been more severe for the citizens of nations imposing the sanctions than for the citizens of the targeted nation (Russia). Amid this inflation and monetary madness, the premiums to secure physical silver are at record levels, exceeding 80% for some sovereign coins.

Beginning on Friday, September 3, Sweden’s Prime Minister announced a willingness to spend $ billions to support utility companies (throughout the region, not only Swedish companies) after Russia announced it was shuttering the remaining gas pipeline into Europe. Higher gas prices have sparked paper losses on the books of major power producers, leading to margin calls and certain bankruptcy without immediate short-term financial support. When futures contracts mature later, it is believed that power companies will recover short-term losses when their hedges pay off. This does nothing about the original challenge of supplying natural gas to customers heading into winter; the hullabaloo seems to be centered on salvaging paper losses on paper markets. It remains to be seen how this financial infusion to keep power companies alive will affect the availability of natural gas for people to heat or cook with.

Sanctions that were supposed to cripple the Russian economy have for now done more to make life miserable for those living in the sanctioning countries (see graphic), such as Great Britain. Not to be outdone, incoming British Prime Minister Liz Truss has announced a 130 billion (British Pound) subsidy to “cap” the energy price for consumers. It essentially amounts to offering currency to consumers and businesses to pay utility bills. Still, it does little to address the underlying problem of not having the ability to produce power in the first place. While much discussion has centered on short-term infusions of newly created currency into the economy, some have advanced a discussion on alternative energy sources, such as solar. This has helped spark a rebound in silver prices, mentioned in Tuesday’s Metals Minute.

Perhaps the height of lunacy is doubling down on the policies that have created havoc across Europe and other parts of the world concerning energy costs. The same officials who advocated for sanctioning Russian gas suppliers are now recommending putting a “cap” on Russian energy prices. That makes as much sense as going to the grocery store and announcing, “I will not pay more than $2.00 for a loaf of bread.” As you stand there defiantly, other shoppers roll their carts to the checkout to pay $4.00 for the last remaining loaves of bread. No sooner were Western caps on Russian energy announced than Russia announced it would bypass the caps by refusing sale to sanctioning nations. A new arrangement was revealed with National China Petroleum Corporation to purchase Russian energy with yuan or rubles only, no dollars or euros allowed.

Adding insult to injury, Europe is still purchasing Russian energy supplies - but from China, sometimes paying prices 2-3x higher than they used to pay from Russia directly. But while at the same time, energy prices are skyrocketing throughout Europe, many see a recession on the horizon. With inflation expected to top 22% in Great Britain and elsewhere due to energy prices, a recession would place Europe squarely in the jaws of the stagflationary conditions that have traditionally favored physical precious metals. We began to suss out hints of stagflation here in the United States last year and alerted our readers accordingly. Now it is not only Americans awakening to the ability of precious metals to protect purchasing power during stagflation, but Europeans as well. Having similar (or more severe) conditions elsewhere in the world means that competition for protection from stagflation is going worldwide.

One of the reasons that precious metals have fared well during the rare condition of stagflation is due to the economic destruction heaped upon other asset classes. Companies, and in some cases entire industries, are being shuttered across Europe due to energy prices and availability. Businesses, small and large, are being impacted. When the donut shop down the street closes, it might not affect the stock market. But when aluminum and glass manufacturers close their doors, it impacts every company that needs aluminum or glass to manufacture their products. What happens to stock prices of companies that shutter manufacturing or have no products to sell? The Finance Minister of Germany was recently trying to explain that businesses can exist without doing business. Meanwhile, German bankruptcy filings were up 26% in August, highlighting the difficulties of having government officials out of touch with the financial realities of the business world.

It wasn’t that long ago we wrote about negative interest rates and how they were being implemented across Europe. Interest rates have only recently risen and are below the inflation rate in the United States and Europe. As a result, world bond markets are printing record losses this year. Owning a bond paying 2-4% when inflation is 8-20% is a guaranteed way to lose purchasing power. As interest rates rise (which they are), the value of existing bonds falls. In a stagflationary environment, the normal safe-haven status of bonds comes into question as bond prices fall.

When businesses close, their stock price decreases or goes to zero, reducing their real estate needs. Bankrupt businesses cannot pay their leases. Higher interest rates put further pressure on the amounts people/companies can afford to borrow. Real estate prices begin to fall. We are already seeing this happen here in the United States and across Europe, as house prices fall and commercial vacancies begin to rise. In light of lower stock, bond, and real estate prices, precious metals emerge as one of the few asset classes with room to grow in times like these.