🎙️ Rearmament Reckoning

I'm sorry, but we can’t ignore talking about gold again. Not after its hot streak to start 2024 amid a broader commodities rally, geopolitical tensions, and central bank moves.

The Bullion is a critical component of central bank reserves because of its safety, liquidity, and return characteristics.

Central banks own about 20% of all gold mined in human history. China is gobbling up plenty of it, mostly in an effort to lessen dependence on the U.S. dollar, aka “de-dollarize.”

— Matthew & Shawn

Here’s today’s rundown:

Today, we'll discuss the biggest stories in markets:

• Commodities rally reflects better economy

• The $10 trillion rearmament reckoning

This, and more, in just 5 minutes to read.

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In The News

🛢️ Commodities Rally Reflects Better Economy

Move over, big tech. Commodities are on a hot streak, from Crude to gold to copper. 

Investors are betting on a prolonged economic fiesta: The S&P GSCI, a global commodities price index, is up about 12% this year vs. the S&P 500's 9.1% climb. Copper and oil are leading the charge, with prices up by more than 10% and a whopping 17%, respectively. Gold is on fire, too, hitting a new high of $2,332 per ounce.

• Fueling this bullish bonanza is the expectation of a demand surge from the U.S. and China, backed by recent manufacturing sector comebacks.
  

• One commodities trading team expects further price hikes due to growth in global goods demand. 

The commodities frenzy could complicate the Federal Reserve's inflation-fighting and interest rate-cutting plans further. 

• “Commodities are going to be potentially one factor that can interfere with Fed cuts,” said the head of global commodities and derivatives research at Bank of America.

Zoom out: The recent run reverses the 18-month slump in commodity prices after Russia's invasion of Ukraine in early 2022. Gloomy economic outlooks, recession warnings, and higher interest rates all sent investors running from commodities. 

• However, the recession never came, and the economy stayed strong even as inflation cooled. “A tight market and rising macro optimism are driving crude oil prices higher,” the International Energy Agency noted, adding that inflation might rise as a result. 

The $100 club: Recent oil market drama, including Russian drones and Middle East conflicts, has boosted petroleum prices, pushing Brent crude futures past $90 a barrel. The $100 mark could be next, per Bloomberg forecasts.  

Why it matters:

Energy companies love this commodities party, with the energy sector on its way to the second-best performer spot in the S&P 500 this year. Oil producers like ExxonMobil are hitting all-time highs, and copper prices are feeling the love, especially from China.

Copper topper! Copper’s price is a popular barometer of economic health, which some appropriately call “Dr. Copper” because of its use in construction and electronics. Futures on copper have jumped more than 16% in the past two months to $4.28 a pound, their highest level since June 2022, suggesting an uptick in economic activity.

• Macro hedge funds are flipping the script and betting on rising prices, further fueling the commodities frenzy.
  

• One hedge fund partner said his fund increased investments in oil and gold to hedge against inflation, which they don’t expect to fall to the 2% goal. Despite the soaring commodities prices, he's not hitting the sell button, either, aiming to ride this commodity run that could keep rolling through year-end.
  

• “We want to catch the wave,” he said. “You don’t want to get off too early.”

Read more (how commodity prices impact markets and inflation)

More Headlines

⌨️ More Americans now prefer hybrid over fully remote work

🏍️ Lime is growing its fleet of bikes by 30,000

📈 Wall Street gives its highest S&P 500 forecast yet

🏀 UConn men’s basketball claims sixth national title since 1999

⚜️ Costco sells up to $200 million in gold bars monthly

🎥 The popular YouTube channel DudePerfect scores a $100 million investment

🔫 $10 Trillion Rearmament Reckoning

War is, unfortunately, a big business. Despite tribal conflict seeming outdated in the 21st century, it remains an enduring aspect of the human experience. This means, unsurprisingly, that the “military-industrial complex” holds significant but often overlooked sway over economic activity.

On Tuesday, Bloomberg proclaimed a “new era of global rearmament” as Western nations grapple with the need to dramatically increase defense spending to address security concerns from Russia, China, and the Middle East.

While NATO members are progressing toward collectively contributing 2% of GDP to defense, some think defense spending may need to return to Cold War highs closer to 4%. Bloomberg Economics calculates that over the next decade, that would translate to an additional $10 trillion of defense spending for the U.S. and its major allies.

• Its chief geoeconomics analyst added, “The post-Cold War ‘peace dividend’ is coming to an end…That’s likely to have a transformative effect on defense companies, on public finances, and on financial markets.”

Why it matters:

Putin’s invasion of Ukraine, combined with China’s militarization of the South China Sea and ambitions to reunify Taiwan, in addition to mounting unrest in the Middle East with the prospect of disrupting global trade through the Red Sea and oil flows, most Western leaders see the need for higher defense spending.

Good for the money? One question is whether they can afford it. Rising debt levels in recent years and higher interest rates are already weighing heavily on public finances.

• A renewed need for greater defense spending would likely force politicians and voters to make tradeoffs regarding welfare, taxes, and national security.
  

• And rising defense spending is hardly a Western-only phenomenon. Russia’s estimated defense spending, at 4.4% of GDP, is the highest globally, and China is expected to increase defense spending by 7.2% in 2024.
  

• Malaysia and the Philippines will raise spending by 10.2% and 8.5%, respectively.

The U.S. is eyeing higher spending, too. Despite dwarfing other nations’ total budgets, Matthew Kroenig of the Atlantic Council told Bloomberg that “The U.S. is nowhere near where it needs to be.”

• That’s great news for shareholders in major defense contractors like General Dynamics, Lockheed Martin, and Northrop Grumman, which have delivered strong returns in recent years.

Watch this short video for more

Quick Poll

Yesterday, we asked: Will Zimbabwe's new gold-backed currency solve its inflation issues?

— On team No, “A change of mindset is needed, as soon as things get difficult this new initiative will fold. It’s people that create faith and a corrupt government will never generate faith in a population.”

Said another, “In theory yes, but in practice I bet that they won't have the discipline to stick to it. In the end they're gonna print money again - beyond any gold-backing they have.”

— On team Yes, “America needs to get back on the gold standard as well.”

And, “Solve...I don't know, but tame...probably.”

See you next time!

That's it for today on We Study Markets!

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