International Man: The world is in its most precarious geopolitical environment since World War 2.
Considering similar historical periods, what have been the most important investment implications of global conflict between the world’s biggest powers?
Doug Casey: The big question is whether or not WW3 will go nuclear. And if it does, will it be just some relatively small-yield tactical bombs used against military formations? Or will it get out of control, with strategic weapons used against cities? Either is possible.
Let’s just hope NATO doesn’t back the Russians into a corner, the Zelensky regime stays out of NATO, and the Israelis don’t go nuclear against the Iranians.
As WW3 develops, I don’t think there’s any question it will have significant cyber aspects as well. The whole world runs on computers. Computers control utilities, transport, the banking system, communications, commerce, distribution, and everything else. If computer networks are massively hacked it could collapse civilization. The result could be mass starvation after a couple of weeks.
And, of course, there’s a real possibility of biological warfare. If any of these things happen, it increases the odds of all of them happening.
So price movements in the commodity and financial markets will likely be the least of our problems. Let’s assume, therefore, that things don’t go beyond a regional level.
One current difference in how WW3 is evolving is that almost all of the governments of the world are already bankrupt. Historically, governments only go bankrupt during or after wars; this time they’re all bankrupt before the war has really even started. They’re all welfare states with huge fixed domestic spending. They already have an unrepayable amount of debt. That’s never been the case previously.
Along with unsupportable debt, and high levels of currency debasement, taxes are already at the 40%, 50% or 60% level for most countries. Before World War I and even before World War II, taxes, inflation, and debt were only a tiny fraction of present levels. Governments could access huge resources. Even though the world is much richer, it hardly seems possible now. They’re already running on empty.
WW3 will be limited by the financial ability of governments to fight. There’s a bright side, I suppose, to most of the world’s governments being financially unstable or on the ragged edge of bankruptcy, very much like the US government.
It may serve to limit the damage they can do. But, then, I’m an eternal optimist…
International Man: How does war typically influence the prices and availability of critical commodities?
Casey: They’ll go higher. Throughout history, governments have debased their currencies to finance their wars. Prices of commodities always rise, with prices for war material leading the way.
But this war isn’t likely to be as materiel-intensive as wars in the past. Technology and chips will replace a lot of steel, aluminum, and copper, which is just as well since it takes years for new mines to produce metals.
It’s hard to say exactly how any chaotic situation will evolve, and war is pure chaos. But if I’m right that WW3 is not going to be as materiel intensive as past wars, then maybe we should look at luxury goods as opposed to bulk commodities. In the War Between the States, Southern blockade runners carried lots of coffee, tea, and other luxury items in addition to arms. Wars always create distortions in the ways people act, and the ways things are used. When the war is over, one thing that’s certain is that the economy will snap back to sustainable patterns. But there’s no point in planning that far ahead.
Oil will certainly be a major fulcrum, as it was in WW I & II. Most of the world’s oil is produced in just a few places and shipped through just a few chokepoints. Demand will go up since it’s the densest kind of energy there is, but production, refining, and shipping facilities will be destroyed; at some point soon, we should see all the hydrocarbons skyrocket. In addition, governments always put on both wage and price controls and foreign exchange controls during wartime. These things will create shortages for civilians and will be most inconvenient.
International Man: Can you share specific historical examples where war significantly disrupted commodity markets, and what lessons can investors learn from these events?
Casey: Since the days of the Bible, war has included burning crops, cutting down the enemy’s orchards, and even salting the fields where his grain grows. That’s unlikely to change. Battles are won by soldiers; wars are won by controlling resources and commodities.
Japan is a classic example. The country has no hydrocarbons, no metals, and few resources of any kind. When the US cut off their oil and steel supplies in 1941, they felt war, however risky, was the only their alternative.
During the war, they tried floating incendiary balloons to the US Pacific Northwest to start forest fires. It wasn’t an effective countermeasure, but it shows the way combatants think. This time, I wouldn’t doubt that various players will use bacteria or viruses to attack crops. It could be devastating since food crops are grown in gigantic monocultures, stretching for thousands of square miles. Wholesale contagion through biowarfare will be much more effective than the random methods used in the past.
Fertilizers are bulk commodities that need to be shipped across the globe by the megaton; that makes them prone to be cut off. You can expect food prices to go much higher as WW3 heats up. In just the past 50 years, corn yields per acre have about quadrupled. A lot of that increase is due to mass fertilizers. Cut off fertilizers and other chemicals and you’re looking at a famine.
Most countries don’t produce much of anything locally anymore. The world turns on trade. If you cut off trade—a prime strategy during war—both exporting and importing countries are likely to suffer an economic collapse, or worse.
International Man: How does financial and economic warfare—sanctions, trade restrictions, seizures, embargoes, etc.—shape commodity markets during wartime?
Casey: As I said, past wars were comparatively local matters. Easily available nearby materials were used to fight the war. But now everything is shipped around the globe. Supply lines are now both highly complex and critically important to winning. And very easily cut with today’s military technology.
Some parts of the world are going to be hurt a lot more than others.
Africa has been largely left out of past wars. It survives by importing capital, technology, and food. In return, advanced countries extract their raw materials. WW3 will cut off both. Since local governments there now have serious armies and weapons, the continent could turn into a giant “no-go” zone. Africa could experience a wholesale collapse of civilization, featuring the export of scores of millions of migrants to Europe.
On the other hand, South America is likely to do relatively well. It’s at the end of the road. It wasn’t involved in either World War I or World War II and profited from that fact. It has local industry as well as raw materials. I suspect South America will be a relative beneficiary of WW3.
Europe will be a big loser. Not only is it de-industrializing, but it’s likely to turn into a battlefield again.
The US will almost certainly use its bloated gold-plated military to intervene absolutely everywhere. The consequences for US citizens won’t be good.
International Man: Given the current geopolitical climate, which commodities have the most speculative potential?
Casey: For reasons I’ve mentioned, food will likely go to a premium.
Right now, all the grains—soybeans, wheat, corn, and rice—are very cheap.
Good harvests due to good weather across the globe have driven down prices.
Especially with war in the cards, they’re excellent speculations at the moment.
Oil is reasonably priced right now at $73; producers are doing quite well. But natural gas in North America is $2 per MCF, which is close to all-time lows in real terms.
Technology allows—within limits—any hydrocarbon to be converted into any other. That makes natural gas an excellent speculation. That’s even more true of coal. All the hydrocarbon plays are highly politically incorrect and are considered investment hot potatoes. Believe it or not, yields can be had up to 20%.
Palladium and platinum could go a lot higher; they come from Russia and South Africa, which are both unstable. They’re at decade-lows and only marginally profitable to mine at these prices.
Gold actually remains among the best commodity speculations. That’s because as WW3 deepens, governments—which, as I mentioned earlier are already bankrupt— will print ever more massive amounts of currency to finance themselves.
But how can they conduct international trade with their rapidly depreciating paper currencies? They can force their residents to accept fiat, but not foreigners. They’ll have a hard time trading with each other. Nobody’s going to want to accept Russian rubles, Chinese yuan, Indian rupees, or—here’s the shocker—US dollars. They’re all just paper currencies, the unbacked liabilities of bankrupt governments.
As the Russians recently found, paper assets can easily and arbitrarily be confiscated. Therefore, gold will become necessary for them to trade. Gold means they don’t have to trust one another. Either that or they will go back to barter, which is both costly and inconvenient.
One thing that seems likely as WW3 gets out of control is that all paper currencies will lose value rapidly. And the whole world, both central banks and individuals, will pile into gold.
At $2400, it’s no longer at giveaway levels. But it’s going a lot higher simply because there’s no alternative.
Reprinted with permission from International Man.
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