Commodities have again worked their way onto the front page of mainstream newspapers and lead stories on your nightly newscast. The increased prominence is justified.

Oil has returned to the $90 per barrel level last seen a year ago, in defiance of Federal Reserve1 efforts to calm inflation.2

Indignation at higher energy prices is made worse because the labor market is tight and wages are rising, contributing to service-sector inflation. United Airlines pilots received a 46% pay hike in July, followed by a flight attendants union demand for a 35% pay increase in August.3

The United Auto Workers (UAW)4 strike is underway with its call for a 46% wage boost and a 32-hour work week.5 Worker demands are being taken more seriously as strikes are costly. The US Labor Department notes that US businesses lost 4.1 million workdays due to work stoppages in August, which does not include the UAW strike that started in September.6 The preliminary estimate of work stoppages in August is the highest monthly number since August 2000. US workers are striking at the highest rate in 23 years, putting the focus on supply and demand issues in the economy.

The undersupply of goods and services remains an issue, … particularly in commodity markets

How did we get a 30% rise in oil prices in less than three months?7

  • The US has stopped selling emergency stockpiles of oil into the commercial market. Over the last several years, the US Government's emergency stockpile has been drained from 695 million barrels in January 2017 to 350 million in August 2023. Some of those sales were mandated via Obama-era bipartisan legislation, but the release of 345 million barrels of oil into the commercial markets did lower oil prices until recently.8
  • Saudi Arabia extended voluntary production cuts of 1 million bpd, currently through December 2023.
  • Russia extended voluntary production cuts of 300,000 bpd, currently through December 2023.9
  • US oil production is 12.9 million bpd, an all-time high, but the US now exports 2 million bpd more than in 2019.10 That 60% increase offsets rising demand and falling supply elsewhere, so we don't receive the low price benefit of increased production.
  • US citizens traveled in numbers never seen before, exceeding even the 2019 volume, raising fuel demand.11
  • The International Energy Agency12 notes that 2023 global oil demand will rise by 2.2 million bpd due to strong air travel, increased fuel use for electricity generation, and surging Chinese demand.13

What BRICS expansion could mean

The oil price rise may have overshadowed the 15th annual BRICS summit held last month – an important event with implications for commodity markets in the medium term.

This year's meeting, which normally includes Brazil, Russia, India, China, and most recently, South Africa, added six more countries: Argentina, Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates. The addition of these countries means the new BRICS group of countries now accounts for 46% of the global population, 43% of global oil production, and 29% of global gross domestic product, certainly figures themselves that demand attention. It is essential to understand the motivation to join the group as several countries have been in decades-long disputes with each other. Egypt and Ethiopia have been in an ongoing dispute that started in 2010 over the Grand Ethiopian Renaissance Dam, which Egypt believes violates a 1959 treaty on water rights for the Nile River. Iran and Saudi Arabia have been in regional conflicts since 1979 that have occasionally escalated to proxy military confrontations.

BRICS leaders look beyond disputes, but why?

The Council of Foreign Relations states, “The slew of applications to join the BRICS is clearly a symptom of a deeper malaise. The west's proclivity to deploy unilateral financial sanctions, abuse international payments mechanisms, renege on climate finance commitments, and accord scant respect to food security and health imperatives of the Global South14 during the pandemic are only some of the elements responsible for the growing disenchantment with the prevailing international system.”15

Sanctions a motivator of emerging markets?

A working paper published earlier this year by the International Monetary Fund16 noted that primary economic issues for developed countries result from geopolitical stress, while emerging market issues come from economic stress, often as a result of sanctions. “Financial sanctions are often imposed by the US, UK, EU and Japan, the main reserve currency economies,” the IMF wrote.17 The paper shows that of the ten largest annual increases in gold's share of foreign reserves since 1999, half of them were in countries subject to sanctions in the same year or in the two preceding years. Said another way, sanctions motivate emerging market countries to diversify their foreign reserve holdings into gold.

Regardless of motivations, central bank purchases of gold have been a critical part of the gold story over the last few years. Gold ETF investors sold 13 million ounces of gold last year from April through year end and sold 4 million more ounces this year through August. On the other hand, central banks have been large buyers of the gold, snapping up 1,078 tons last year and 228 tons in this year's first quarter.18

Final thoughts

The expanded number of countries participating at this summer's BRICS summit shows in vivid terms the propensity of emerging countries to choose their own path, unencumbered by foreign policy wishes of global reserve currency nations. The implications for increasing the share of gold in their foreign reserves is a potential positive for gold prices.

1 The Federal Reserve is the central bank of the United States of America.
2 Bloomberg, as of 15 September 2023.
3 https://www.reuters.com/business/aerospace-defense/united-airlines-pilots-reach-agreement-principle-receive-about-35-pay-increase-2023-07-15/
4 UAW is a large US trade union for car, aerospace and metal industries.
5 https://abcnews.go.com/Business/day-workweek-46-raise-uaw-makes-audacious-demands/story?id=102926195
6 https://www.wsj.com/business/the-u-s-lost-4-1-million-days-of-work-last-month-to-strikes-92c6a9f7
7 Bloomberg data oil 06/27/2023 to 9/15/2023
8 https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?f=M&n=PET&s=MCSSTUS1
9 https://www.nytimes.com/2023/09/05/business/saudi-arabia-russia-oil-cuts.html
10 https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=WCRFPUS2&f=W
11 https://www.tsa.gov/news/press/releases/2023/08/29/tsa-prepares-labor-day-weekend-travelers-busy-airports-based-summer
12 The IEA is an autonomous intergovernmental organization that provides analysis on the energy industry.
13 https://www.iea.org/reports/oil-market-report-august-2023
14 Global South is in reference to a group of countries defined as having a relatively low level of economic and industrial development.
15 https://www.cfr.org/councilofcouncils/global-memos/brics-summit-2023-seeking-alternate-world-order
16  IMF is a financial agency of the United Nations funded by 190 member countries
17 https://www.imf.org/en/Publications/WP/Issues/2023/01/27/Gold-as-International-Reserves-A-Barbarous-Relic-No-More-528089
18 https://www.gold.org/goldhub/research/gold-demand-trends/gold-demand-trends-q1-2023


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ETF002095 9/30/24

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