Commodities have been rallying quite a bit lately.
Most notably, nickel soared due to the sanctions the West put on Russian natural resources.
Russia is one of the world’s largest producers of nickel. It’s responsible for 8–11% of annual global production between 2017–21, based on data from Kitco and Statista.
You can see in the chart below how nickel went parabolic:
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| Source: Thomson Reuters Datastream |
Nickel could’ve gone up even further if not for the London Metals Exchange (LME) halting trade.
But why is any of this strange?
I’ll tell you why.
This is not just a reaction to sanctions. What we are seeing is the turmoil in our current fiat currency system escalating to a new level.
Let me explain…
Bailouts of major players show the financial system’s fragility
The bigger issue is that this isn’t something you would see in a truly free market.
Market participants drive this financial system by speculating on market contracts. Market volumes from these traders tend to exceed the actual physical exchange of the underlying assets.
In the case of gold and precious metals, there is a case to suggest that central banks and financial institutions are seeking to control the price of precious metals to protect the (perceived) integrity of their fiat currency system.
The aim is to keep the price of gold from rising too much.
You may have seen the occasional sudden spikes up and down — what I view as strange and irregular trading — between the opening hours of major markets.
This system of price control can work but occasionally the market faces a monumental shock that unravels everything.
This occurs when prices rise parabolically, as was the case with nickel.
If a large participant is facing massive losses, the regulators will step in to intervene to prevent market contagion events.
And not surprisingly, US bank JPMorgan emerged to rescue the Chinese company Tsingshan Holding Group, which owed US$8 billion in a margin call for their nickel position.
There are surely a lot of hedge funds and small traders who are probably in a world of hurt after taking a similar position on nickel during this period. Unfortunately, you won’t hear about them as their screw-ups were not as monumental…and therefore not contagious to the broader financial system. As in, they eat their losses like you and me in the stock market.
Last year, you saw this happen with Melvin Capital facing a collapse after it got caught in the short squeeze on AMC Entertainment Holdings [NYSE:AMC] and GameStop Corporation [NYSE:GME].
Basically, same story but different characters and time.
The point I’m making is that these short squeezes followed by market pauses in trading and bailouts of financial institutions that took the wrong side of the bet may be portending the imminent doom of our current financial system.
Yes, it seems like this should have happened long ago and don’t expect it will happen tomorrow.
However, the increasing frequency of such occurrences in recent times shows that the system is near breaking point.
Market laughs off anaemic Federal Reserve rate hike
We can see it another way.
This week, the Federal Reserve announced that it would raise the Federal Funds Rate by 0.25%. This was within market expectations. There was no way they could go harder, especially after Chair Jerome Powell said earlier this month he would back this rate hike and nothing more.
Not long after Powell made that announcement, the price of oil took off further.
Point being? The Federal Reserve just put itself even further behind the ball on controlling inflation.
The markets, therefore, turned their eyes on what the Federal Reserve would do after the March meeting. March was a write-off for them.
The press announcement showed that the Federal Open Market Committee’s game plan in controlling runaway inflation was for rate hikes in every single upcoming meeting for 2022.
Oh, the Federal Reserve is now talking big to control the big bad inflation monster!
The markets were initially spooked by this.
The US markets had opened Wednesday trading significantly up, expecting this anaemic rate hike. The announcement caused the stock indices to give back their gains.
For a short while.
Everything started to bounce back up in the last 90 minutes of trading.
Basically, the markets laughed off the plans of the Federal Reserve. There is already an expectation that not only will it not control inflation but that the Federal Reserve could well be forced to cut rates soon.
It is my belief that the current fiat currency system will die by the inflation it created from its monetary policy. It is now facing this scary prospect and the central banks are unable to do much to stop what is coming.
We are merely watching signs of it falling apart.
I have my suspicion that the final nail in the coffin will likely come from gold, the very thing that the fiat currency system sought to replace.
As to when this will happen, it is hard to predict. It’s a mug’s game to try and put a finger on the date and time.
A better way to do it is to position yourself, like I have been for many years already, for gold to break out of the fiat currency system’s shadows.
I do it with my ‘niche gold’ portfolio. Read here to learn more.
God bless,
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Brian Chu,
Editor, The Daily Reckoning Australia
