The financial debacle in Cyprus is just one trigger leading to energy price inflation around the world, says Tom Luongo of LiveCharts.co.uk.
What does Cyprus have to do with rising energy prices? How can an attempt to take money from insured depositors put upward pressure on oil and gas prices?
Simple. Inflation. If we though the world was awash in liquidity now, just wait until it truly sinks in to people across Europe and the US that their savings—which are currently not earning anything anyway—are not safe from the long arm of the government.
If I were truly a conspiracy theorist, I would seriously entertain the notion that this was the intended effect all along.
The Fed was successful in scaring savers with the announcement of more quantitative easing in December, when fear of the fiscal cliff pushed the savings rate up from 4.1% to 6.5%—only to see it crash after New Year’s to a paltry 2.1%.
But it still hasn’t been successful in getting the money to flow. It has simply pushed into equities. Eventually, however, valuations there will have to bow to the reality of rational multiples, as well as softening global demand of everything from Aluminum to thermal coal.
Against the background of massive QE coming from the Fed—not to mention monetary easing from Japan, China, India, Brazil, and others—we have Cyprus and the fear that the money we have in our bank accounts is no longer safe. If the major central banks’ goal is to drive the savings rate negative, they may have found a means by which to do it.
Modern fractional reserve banking is a confidence game—one in which for every dollar one deposits in the bank, 90 cents of it is lent out—even though you still have on-demand access to the entire dollar. As long as everyone believes the banks will be open tomorrow and they have lent the money out responsibly, the system will work.
But if there is any reason to doubt that your dollar is not safe, the rational thing to do is to get the money out. This is normally known as a bank run, and we currently are having them across Europe.
Which brings me to energy prices. Looking at a chart of the price of Brent Crude (BNO), I see a chart which is poised to take another run now at the $88.50 to $90 area, corresponding to $120 to $125 per barrel.
If we do get all of this cash sloshing around being spent, it will bid up the price of everything. But first and foremost, it will bid up the futures price of oil. We are off to a great start in April, as BNO broke the March high price on April 1, thereby creating a low probability of a test of the March low.
The oil market—with its strong close to the month of March, and by extension, the first quarter—is primed to rise through Q2.
Moreover, US oil prices, despite accelerating production levels are rising with West Texas Intermediate Crude (USO) approaching $97 per barrel. Natural gas futures have crossed the $4 per million BTU mark for the first time in nearly two years.
High energy prices mixed with low GDP growth and high unemployment is commonly referred to as stagflation. And with stagflation, ultra-loose monetary policy—and now the added impetus of deposit fear—inflation assets will perform very well.
At 14.4 to 1, the Brent to Gold ratio is currently too low. Expect that to rise back over 15 in the coming months as well. Some of that lost faith in the banking system will find its way into physical precious metals, which will in turn cause problems in the futures market.