Is This Commodity Price Spike Transitory?

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The McAlvany Weekly Commentary

with David McAlvany and Kevin Orrick

Is This Commodity Price Spike Transitory?

March 8, 2022

The key is to have the mindset of the institutions that will sit back and wait for weakness. And on every bit of weakness, they’ll add to a position. You don’t have go out and load the boat today, but you do have to recognize that there has been a massive change. A massive shift. The investment world is taking note of inflation stubbornness. They are recalibrating. If you don’t, you will find that you’re lost in the shadow of stagflation in the period ahead. — David McAlvany.

Kevin: Welcome to the McAlvany weekly commentary. I’m Kevin Orrick, along with David McAlvany. 

Inflation. That seems to be on the minds of everyone. And Dave, before we start this program today, I’d like to read. You turn me onto a book by Barton Biggs called Wealth, War, and Wisdom. You’ll remember this paragraph, it’s on page 213, and it’s about the German hyperinflation back in the early 1920s. So here we go. Reading from Barton Biggs: “No chart can capture the stupendous ascent slope of true hyperinflation. Numbers actually do a better job. From 1919 to 1921, German CPI inflation was gradually rising from virtual price stability to a 2% annual rate. By June of 1922, inflation was at an annual rate of 4%. By September, 22%. By December, 68%. And then it really took off. In March 1923, it hit 285%, then 765% in June, 1,000,500% by September and finally 152,221,670,000% in December.” 

Dave, I’m not saying we have hyperinflation, but look at the numbers over the last couple of days. Nickel, I mean, gold.

David: Yeah. I will make the case this time, and you’ll be surprised to hear it, but this is transitory.

Kevin: Very transitory. It’s going to go away tomorrow. Is it—

David: When you have war and price increases, which are, again, price increases that are conflict driven. You’re really talking about a force multiplier for an inflationary trend. We have inflation. We have had inflation, not just for the last 60 days or the last two weeks of the Russian and Ukrainian incursion, but we had a backdrop that was highly inflationary to begin with, and we’re moving towards 10% on the US CPI and 20% for the US PPI. Now we’re going to get there a lot faster because of this conflict. The conflict is transitory. This particular force multiplier for the inflation figures is transitory. Nickel going from 24,000 to 50,000 to 101,000 in a matter of 72 hours—

Kevin: Wow.

David: —is transitory. There are dynamics there which have nothing to do with the money supply. They have to do with someone who is short— a Chinese billionaire who is short the nickel market, and is being forced to cover with mark-to-market losses in the billions. 

So it’s a unique dynamic with each of these commodities. You see wheat going through the roof, whereas other commodities are not because you are dealing with a particular geography, a particular conflict. And yes, when you look at Wealth, War and Wisdom, Biggs’s book, he chronicles how your worst-case scenarios are in fact, transitory. You can get through even a world war in a matter of two to three years, and then it is done. And then it is done. What makes this inflation so pervasive, and I think non-transitory is that it’s driven by money supply growth on a global basis. That it’s driven by money printing on the one hand, but also of fiscal policy maneuvers on a global basis. And that has served to create an inflation that is ubiquitous. And it’s not one particular commodity. 

What we’re seeing now is the high drama of conflict. The high drama of war. We’ll get to gold in a minute, but on our way there, we first consider the 30% moves in crude.