There are many reasons why now would be a good time to invest in precious metals. Today we will look at the overriding reasons why and what distinguishes today from most other periods in history. If I was to describe the overriding reasons to own precious metals in two words, I would use the words "Inflation" and "BRICS." Inflation has begun rising again, and the BRICS nations have an important meeting and announcements next week that will further impact inflation in Western nations and the value of the American dollar. Owning precious metals helps to mitigate both of these risks to the average American.

Oil, Inflation, and Gold

While most Americans might be unaware that the cost of a barrel of oil has risen 20% in the past month, they are very aware that a gallon of gasoline has risen 15% during the same period. 

The price of oil impacts nearly every sector of the economy. When the price of oil rises, so does the price of most goods and services purchased by consumers. Most items we purchase are first transported from somewhere else. Many of these same items are either manufactured from a petroleum byproduct (i.e., plastics) or grown/harvested from machinery that requires petroleum as fuel and lubricants. Even installing a wind turbine in the ocean requires over 18,000 barrels of petroleum, and an annual oil change requires 80 gallons per year. Two million barrels of gasoline are required to install an offshore wind farm. As you can see, even the cost of alternative energy is increased when oil prices rise.

The last time we saw serious stagflation, we also saw higher oil prices. Why is the price of oil rising now? I believe there are two primary reasons. Our Strategic Petroleum Reserve (SPR) hasn't been this low since 1983. We are down to 16 days' worth of petroleum here in the United States. If they release more oil from the SPR, there won't be much reason to have an SPR. The SPR was started in 1977 to prevent the energy crisis and stagflation that developed in the early to mid-1970s from happening again. Today our petroleum reserves are at a 40-year low at a time when oil demand in the United States exceeds supply. In a recent interview aired on the Weather Channel, President Biden articulated his continued goal of reducing the amount of petroleum available in the marketplace while promoting alternative sources of energy. As noted in the preceding paragraph, however, alternative energy creation itself often requires the use of petroleum.

Geopolitical concerns provide the 2nd reason for oil/energy to be moving higher. With continued Western sanctions on Russian energy, the destruction of the Nordstream pipeline, and oil output cuts from OPEC nations, the Institute for Energy Research predicts oil prices could reach historic highs in 2023. Ironically, the US is exporting record amounts of petroleum products (highest amount in 70 years) while also importing the lowest amount of petroleum products in 30 years. This comes at a time when oil consumption in the US is also near an all-time high. 

These factors combined are helping drive up the cost of energy in the United States, which has helped make inflation "sticky."

During the inflationary/stagflationary period between 1972-82, higher interest rates were used to help bring down inflation. While we are seeing the highest interest rates in decades, I believe we are unable to afford the interest rates needed to stop inflation. Today's rates of 5-6% are only a fraction of the 18-20% rates seen in the early 1980s. Back then, the national debt was only 30-40% of GDP. Over the last three years, the ratio has been between 120-135% of GDP. In other words, we couldn't afford to pay the interest on the national debt if interest rates rose to the levels needed to quash inflation. 

At current interest rate levels, annual costs to service the national debt are expected to exceed $1 trillion, which is more than our projected defense budget for a year. This suggests that inflation might continue above the 2% target, as we are unable to afford the interest rates necessary to squash inflation immediately.

BRICS, Dollars, and Gold

Next week, we will know with certainty what is announced at the upcoming BRICS Summit in South Africa. There has been rampant speculation and contradictory statements shared by various members of the trading block about a new trading currency or system being introduced to dethrone the dollar in world trade. Some have speculated that there might be a gold-backed currency released, while others talk about systems of trade without a new currency being involved. While no one knows for sure, in the end, the specifics matter little. The results will undoubtedly be increasing competition for the dollar-based system of trade and a decreasing role for the dollar as the World Reserve Currency. There are several factors playing into this, discussed below.

The BRICS nations have already accomplished much of the groundwork necessary to begin moving away from using the dollar in world trade. They have formed their own version of the World Bank, IMF, and SWIFT bank settlement system. Central banks around the world have continued to purchase record amounts of gold in 2023, as they did in 2022. Depending on how many nations are allowed to join the BRICS+ coalition, they will have 50-80% of the world population and over half of the global GDP represented in a network moving away from the dollar-based system of trade. This will apply downward pressure on the value of the dollar, as fewer nations need to store or use dollars for trade amongst themselves. Another way of describing this is continued inflation for Americans using devalued dollars.

Higher Lows/Higher Highs for Precious Metals

No matter what specifically comes out of the BRICS Summit, gold is moving to the forefront of importance in world trade, and the dollar's role is likely being diminished. The inflationary forces at work domestically in the United States, combined with the downward pressure applied to the dollar from the expansion of BRICS, should create a strong impetus for the average American to want to own precious metals today. Energy prices help put a floor under precious metals prices, as energy costs are a large component of mining and refining precious metals. Rising oil and energy costs diminish the risks of lower metals prices, while the future devaluation of the dollar increases precious metals prices in dollar terms. While prices can fluctuate daily, Americans will see higher prices for most goods and services. Owning precious metals helps protect future purchasing power as metals prices move higher as well.