Volatility Rising

Volatility reigned in markets this week. The VIX volatility index closed the week above $20, with the exception of gold and silver. Commodities sold off, and the U.S. dollar made new lows in its most recent decline. The dollar index is now at a crucial juncture. After breaking below the 90 level several times throughout the week, the critical support level of 89 is now in play. If the dollar index drops below 89, it will mark new lows for the decline that started during the early stages of the Covid crisis. For the dollar, a break to new lows would open the door for another significant and prolonged leg lower in the index, and provide a big shot in the arm to hard asset prices and all weak dollar trades.

Oil inventory numbers reported a build this week of 1.3 millionbarrels, while gasoline and distillates reported large drawdownsof 2 million and 2.3 million barrels, respectively. That led to a net drawdown for petroleum products on the week. The inventory report also revealed that US production numbers remained unchanged at 11 million barrels. In addition to the bullish bias of the inventory report, big bets were increasing on oil in the options markets, reaching $100 dollars per barrel by December.

Despite the bullish inventory numbers and option market activity, crude oil prices nevertheless declined on the week.Much of the decline in oil prices is attributable to numerous rumors and leaked comments from officials that US sanctions on Iranian oil exports will soon end and unleash otherwise restricted Iranian oil supply back into the market. While Iranian oil production is very significant, the relatively muted decline in oil prices and bullish activity in the options market may indicatesubstance in a widely held belief that much Iranian oil production already finds its way to market despite sanctions.

Also affecting oil prices was broad weakness in commodity markets generally. The recent broad-based commodity declines represent a pause in what has been a year of surging commodity prices. The rise in commodity prices since the Covid trough has been so steep and relentless that prices in the complex werealready overdue for some consolidation. In addition, the declinesof the last week or so coincided with recent comments fromChina as their cabinet voiced resolve to cope with thecommodity price surge. As the biggest user of commodities such as steel, iron ore, and copper, China can easily sway commodity markets. These markets extended recent losses after the Chinesecomments this week that vowed to step up adjustments on the trade and stockpiling of commodities, and reinforce inspections of both the spot and futures markets.

What the statements out of China dont address are serious solutions to price increases coming from goods shortages and supply bottlenecks. The faster– and stronger-than-anticipated global economic reopening and recovery in the wake of the Covid crisis has unleashed a demand recovery that has significantly outpaced the recovery in the sourcing and production of goods. Adding some fuel to the fire, supply lines for many products and nations are fractured, in disarray, and not fully operating. In addition, more global demand is on the way as many nations that are still struggling to contain the coronavirus increasingly emerge and join the global goods demand party.

Material shortages and supply chain bottlenecks are manifesting across the economic landscape and impacting an ever-increasingnumber of sectors. If the issues persist, the impacts will increasingly permeate the economy and could ultimately negatively weigh on economic growth.

At the moment, however, according to JPMorgan economist Daniel Silver, The economic recovery continues.Mr. Silvers remarks were in reaction to U.S. manufacturing data released this week. IHS Markits flash U.S. manufacturing PMI increased to 61.5 in the first half of this month. That was the highest reading since October 2009, and followed a final reading of 60.5 in April. Economists had forecast the index dipping to 60.2 in early May. While factory activity gained speed amid strong demand, according to Reuters, backlogs of uncompleted work are piling up as manufacturers struggle to find raw materials and labor, boosting costs for both businesses and consumers.For now, it seems to be a race against time to see whether materials shortages and supply chain disruptions can resolve themselves before these issues cause deeper problems in the economy.

As for weekly performance, it was a volatile week for pricesagain. The S&P 500 was down 0.43%. The yellow metal was up 2.10%, silver was also up 0.48%, platinum declined 4.37%, andpalladium was down 4.00%. The HUI gold miners index had a nice week again, up 4.45%. IFRA, the I Shares US Infrastructure ETF, was down 1.15%. Energy commodities were mixed on the week. Oil lost 2.74%, but natural gas prices were up 0.54%. The CRB Commodity Index was lower, slipping 1.19%. Copper was down 3.66%. The Dow Jones US Real Estate Index ended the week up 0.99%, and the Dow Jones Utilities index was up0.09%. The dollar dropped 0.35% on the week. The yield on the 10year Treasury was flat.

Have a great weekend!

Best Regards,

David McAlvany
Chief Executive Officer
MWM L