Get Ready for a Shaky EU and Higher Oil, Dollar, and Gold

Get Ready for a Shaky EU and Higher Oil, Dollar, and Gold: "The risk profile for oil prices is changing pretty rapidly. We think the risk of a conflict is going to build very fast now in the Middle East. There is no premium in the oil price whatsoever. There’s a new sheriff in town, Vladimir Putin, and he has an interest in higher oil prices, not lower oil prices. The old sheriff, the United States, had an interest in stable to lower prices.

What’s going on in the Middle East is the realignment of the petrodollar system. You have the Saudis talking to the Russians about a defense agreement. Deputy Crown Prince Salman, the defense minister, was in Moscow, visiting Putin. They discussed several agreements, including an oil agreement. With the U.S. pullout from Iraq and Afghanistan, U.S. influence over Saudi policy is just about gone. The Russians, on the other hand, need a higher oil price, as do the Saudis, because the Saudis are running through currency reserves at a very rapid rate, and are running a deficit that is nearing 20% of GDP. That isn’t sustainable. The Russians, Iranians, and Syrians are now all on one side of the camp. The Saudis are very concerned that the Iranian-funded, Iranian-trained Houthi rebels in Yemen will hit the Saudi oilfields. The thing to look out for is a deal in which Iran will stop backing the Houthi and, in return, Saudi Arabia stops pumping 10.3 million barrels a day and reduces output. The Russians broker the deal because they can benefit dramatically from a Saudi shift in oil policy. You get a more formal relationship developing between Russia and Saudi Arabia, which together have 21 million barrels a day in production. And they regain control of the pricing mechanism in the next six months. I think the Saudi willingness to over-pump is going to change when the threat to their wells recedes. When the Saudis shift their policy, the oil price will head north."

We think gold goes to $2,700 in the next four or five years, or up about 150%. In the gold miners, you’ll do three to five times that; they’re the levered play. If I was a euro-backed investor, I would start looking at gold in euros. And Japan has to do another quantitative easing. If I’m a Japanese investor, I have to believe we’ll see 141 yen to the dollar from 123 now.

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