September 2023 - Week 2 Edition

Energy Inflation is Returning with a Vengeance

The major inflation indexes are being released this week and they only hint at the massive surge in energy prices since July. The price of crude oil has risen from under $70 a barrel at the start of July to almost $90 this week. This rise is all the more outstanding with the U.S. Dollar Index (DXY) up over 5% since early July, as commodities usually fall when the dollar strengthens.

Going into the release of the Consumer Price Index (CPI) on Wednesday morning, traders pushed the gold price down about $10 on the assumption that the 12-month CPI would be slightly lower in August than in July.  The actual number showed CPI rising the most this year, +0.6% (month-over-month, a +7.2% annual rate) vs. just +0.2% in June and July and +0.1% in May. Energy prices rose 10.5% in August alone, with prices at the pump up 10.6%.

Energy prices were beginning to come down earlier this year but a combination of moves by the global group called “OPEC+” and President Biden’s own anti-petroleum industry moves of shutting down domestic energy production sources resulted in a revival in energy prices. The President appears tone-deaf about the most sensitive election issue out there – high prices at the pump.

Fifty years ago, after the 1973 Yom Kippur War, OPEC instituted an oil embargo that doubled, then tripled, the cost of gasoline at the pump in America. Today, OPEC is led by Saudi Arabia, which produces 10.4 million barrels of oil per day. OPEC also includes many of America’s long-time enemies, such as Iraq, Iran, Libya and Venezuela, which combine to add another 8.7 million barrels per day. OPEC+ adds Russia, with 10.3 million barrels per day and 10 other nations.

Something very interesting is happening with these two biggest oil-producing nations outside the U.S. It seems as if they are trying to help President Biden lose the 2024 election by limiting total global energy output going into the election year. While President Biden headed up to Alaska, Saudi Arabia announced last Tuesday that it is extending its oil production cuts through the remainder of 2023. On the same day, Russia also confirmed it would continue with its 300,000 barrel per day production cut through the end of 2023. Could Saudi Arabia and Russia be trying to influence the election by keeping crude oil prices high, perhaps to embarrass Biden the same way that Biden insulted Saudi Prime Minister Mohammed bin Salman and the entire Saudi royal family and called Russia’s Putin a “murderous dictator” and a “thug.” It may be true but it wasn’t diplomatic.

By contrast, Saudi Arabia welcomed President Trump with an elaborate ceremony and Russia probably feels pro-Trump since the former President wants to negotiate an end to the war in Ukraine instead of funding an unending one. If production cuts in Russia and Saudi Arabia stay in place through 2024, while President Biden keeps forbidding drilling, oil could exceed $100.

On 9/11 this week, after all past Presidents honored sites where America was attacked in 2001, President Biden was in Alaska talking down any new drilling operations there. The Wall Street Journal reported this past Friday that Biden’s Interior Department canceled seven oil and gas leases in Alaska’s Arctic National Wildlife Refuge “based on the best available science and in recognition of Indigenous Knowledge.”  Biden’s Interior Department memo even encouraged agencies to consult Alaskan “spiritual leaders” and condemned “methodological dogma.” 

There was no mention of Congressional laws mandating drilling there.  In 2017, Congress passed, and President Trump signed a law that not only authorized but required leasing for drilling in Alaska’s Wildlife Refuge. It appears President Biden is ignoring that law.

The 2023 Fiscal Year Ends September 30 – Rising to a Post-Covid High

The federal budget deficit in fiscal year 2022 (ending September 30, 2022) was $1.38 trillion but the red ink will almost certainly exceed that level this year, as it reached $1.5 trillion in the first 11 months of FY23 (on August 31), according to the Congressional Budget Office. That was $0.6 trillion more than the deficit during the same 11 months last year. Revenues were 10% lower this year and outlays were 3% higher from October 1 to August 31 in 2023 vs. 2022.

The accumulated national debt is now approaching $33 trillion vs. $31.5 trillion at the start of the year but the bigger change is that the Federal Reserve has raised the Fed Funds rate from near-0% in April 2022 to over 5% now. So, servicing that debt at 5% will cost taxpayers $1.65 trillion per year.

Michael Peterson, chairman and CEO of the Peter G. Peterson Foundation, said, “The concern we have at the Peterson Foundation is not whether the national debt should ever be used. It should be how it is used and how much it is used. And unfortunately, we’re using it for rainy days and sunny days right now.” Economist Ed Yardeni added in his morning briefing this week that, “it’s worrying investors big time that the escalating federal budget deficit doesn’t even merit an explanation from the administration driving it out of historically normal proportions. A federal deficit that’s rising as a percentage of nominal GDP at a time when GDP is rising is highly unusual. At risk is the bond market’s ability to finance the deficit at current interest rates.”

So far, the President and few Congressmen have shown any interest in cutting any spending, so the deficit will grow until we elect responsible representatives. If not, gold is destined to soar.

History has shown that traditionally, in trying economic times and during periods of increased inflation, gold and silver have performed well. If you don’t have precious metals in your retirement portfolio, you need to contact our professional account representatives to help you figure out your next move. And, if you already own gold and silver, it would be a great time to contact us about adding more to help further ensure your investments are properly positioned going forward.

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