Oil price spike has had limited impact on future prices, but once it does, that’s when the broader economy will suffer – Walsh Trading’s Lusk

Lusk told Kitco News he was keeping a close eye on the interplay between equity markets, gold, energy and treasury yields.

“Yields are rising, equities are falling, and the metals are following the equities, just as they followed them up for three years,” he said. “There has been no safe-haven demand here, or very little, because we haven't extended up to new highs, or anywhere near them.”

“The last two weeks, when we've seen oil retreat, we've seen the stock market rally and the metals come with it,” he added. “When it's gone the other way, we’ve seen markets telling us that the metals are following equities lower. It's not extreme; we're not falling out of bed well below $5,000 an ounce. But what we are seeing is no rally, and rallies being sold into. We’re just hovering between $5,000 and, $5,200 here, and we're right back in that mid-$80s range in silver.”

Asked whether he thinks that Asian countries and other developing economies have begun to sell treasuries and other U.S. dollar-denominated assets to fund the higher oil prices, Lusk said it’s still too early for that.

“We're not seeing any kind of panic like that yet,” he said. “Remember, the thing's only two weeks old now. We had a big run up into it, but historically, if you look where prices were, it wasn't too long ago we were in the high $50s. Before the war started, we closed up in the mid to high $60s. Then crude oil closed on the 24th at $71 a barrel.”

“I think if we set the bar here and we stay at or above $90 for a considerable amount of time – for another month or so – then that's different,” he added. “Then it’s going to be more forthcoming, where you're going to see dumping [of treasuries] to meet the rising cost of energy. I don't think we're there yet.”

Lusk said the Reasons have to do with the backward and forward pricing of oil in the marketplace.

“You can see it in the spreads,” he said. “It's just oil that has been sitting on the water, not being able to get to its destination, but it's already been sold; the price has been locked in. It's just a case where you just can't move through the Straight in some instances, but that transaction has already passed. If you look at the spread, we’re at $96 a barrel here [In the front month contract], Sept is at $82. You see, the back months are starting to climb here a little bit, but a few days ago it was down at $74, there's major backwardation.”

“Now that can change, don't get me wrong,” he said. “Markets move, spreads unwind. The value play might be further out if this goes a few more weeks.”

Lusk cautioned, however, that the situation remains extremely hard to predict, because the narrative can change in a heartbeat.

“I think we're in that phase where the market's waiting to see which way [the Iran war] goes, and more importantly, how long it's going to last,” he said. “They said 30 days, four weeks, maybe five. Let's see how long this plays out. But it doesn't seem like from the rhetoric, a deal is imminent here.”

Lusk said that many investors and traders have extreme long positions in the precious metals, so it’s understandable that they would unwind some of them as equities come off and there's more uncertainty.

“You’ve got to keep in mind that a lot of the gold and silver rally ran higher with the equities the last three years,” he reiterated. “It wasn't an inverse relationship; they were running together. That's what's being unwound here. When the equities dive and pull back, the metals are coming right with them.”

“Energies, through a lot of those years, going back to ‘22, have been rather subdued,” Lusk pointed out. “Outside of when we bombed [Iran’s] nuclear sites in June and a couple of other events, the market has been pressured, supply has far outweighed demand. Now you're going the other way. Why? Because there's a war. These things will reset themselves over time.”

“But if I'm a gold or silver bug, I’m looking at something else,” he added. “I'm going to say, ‘Hey, maybe not. Now is not the time to buy. Let's see how low this thing can get.’ Because when it all unwinds, that's when you're most likely getting another surge higher in price for a few months.”

Lusk said that in the near term, he expects gold prices to fall below $5,000 per ounce before they recover and sell off further.

“I think we sell off further,” he said. “I think it's going to be paired up with the equities here for a little bit. That's the way it's been acting so far, so I don't know what's going to disconnect that.”