Under the conflict between Russia and Ukraine, the commodity market has become the focus of global attention because of the epic price fluctuations.

Two weeks ago, Goldman Sachs Group analyst Jeff Currie warned against thisCommodities will be caught in a vicious circle of "turbulence-more volatility".

He emphasized in his report thatThe turmoil will occur in both the commodity and financial sectors and is likely to last for years rather than weeks, causing commodity prices to rise and volatility to increase.

The earnings of banking institutions have been hit in the period since the release of the Currie report, proving that a potential vicious circle in financial markets could push up commodity prices.

Currie explained to thisPrice volatility not only suppresses market liquidity, but also limits the credit funds needed to maintain financial order and physical commodity transactions, exacerbating medium-and long-term capital shortages.

The following picture can more vividly depict this vicious circle, taking oil as an example:

As oil prices become more unstable.

The resulting results spread to a larger range of influence and are more likely to cause losses.

This change has pushed up value at risk (VaR).

For venture capital, the hedging of commodities has been reduced.

The lack of venture capital will reduce market participation, market liquidity will also reduce and aggravate volatility, which will hit potential financiers and investors, further reduce market participation and increase volatility, forming a vicious circle.

Wall Street banks are under a lot of pressure.

This has been reflected in recent earnings announcements by banks.

Specifically, Wall Street banks' exposure to commodities has been rising in the wake of the conflict between Russia and Ukraine, making them more vulnerable to sharp price swings.

Both Goldman Sachs Group and JPMorgan Chase & Co disclosed in their quarterly reports that commodity trading risk indicators were rising, with GSG, an ETF fund that tracks the S & P Goldman Sachs Group commodities index, reporting the biggest increase in a decade.

Among them, Goldman Sachs Group's total daily value at risk (VaR) of commodities reached US $49 million in the first quarter of this year, not only higher than his US $32 million in the fourth quarter of 2021, but also much higher than his US $33 million in stock trading and US $25 million in currency trading.

JPMorgan Chase & Co also reported that the average daily value at risk (VaR) of his commodities in the first quarter of this year totaled US $15 million, up from US $12 million in the previous quarter, but also exceeding US $12 million in the stock market and US $4 million in the foreign exchange market.

In addition, although Citibank did not disclose VaR along with earnings in its quarterly report, it pointed out in its latest report that the total daily value at risk (VaR) of commodities rose year-on-year in every quarter of 2021, peaking at $48 million at the end of the second quarter of last year.

In summary, this will lead to reduced venture capital, reduced market participation, reduced liquidity and increased volatility, and further curbed potential financiers and investors, once again leading to reduced participation and increased volatility, thus creating a vicious circle.

In addition, not only venture capital is "struggling", macro hedge funds and other financial dealers are also "retreating".

Their net long positions in Brent crude and WTI are at their lowest level since November 2020.The long-to-empty ratio of crude oil has fallen to 4.5, well below the five-year average of 6.3.

Currie pointed out that this vicious circle is a direct consequence of revenge in the "old economy".

The "old economy" began to take revenge.

Commodity inventories have been depleted due to underinvestment by commodity producers. Volatility increases as the market loses its balance buffer between small supply and demand shocks.

This volatility affects the real value of the investment, which in turn makes the assets of commodity producers unattractive and makes investors lose interest. As a result, capital is farther and farther away from the commodity sector, and supply capacity and inventory levels can only be kept low.

And what will be the consequences of this vicious circle? You can refer to the scene that appeared in the 1970sThis volatility trap could continue to lead to high commodity inflation and disrupted supply chains.

At that time, the market used different methods to solve the problem.

In the 1970s, the market turned to long-term fixed-price contracts and set up large conglomerates to fend off financial pressures by expanding balance sheets.

In the 2000s before the financial crisis, they used financial markets and higher bank leverage to share risk.

This time, however, is different. Neither of these methods is fully available in today's regulatory environment.

Currie believes that regardless of the progress of the conflict between Russia and Ukraine,None of the economic sanctions imposed on Russia are likely to be widely lifted. So this new and more volatile pricing mechanism may continue to exist in the foreseeable future.

Currie's forecast not only reinforces Goldman Sachs Group's previous view that Brent crude oil reached $125 a barrel in the second half of this year, but also echoes a warning issued by Credit Suisse star analyst Zoltan Pozsar:

Commodities are real resources (food, energy, metals), and resource inequality cannot be solved through quantitative easing. You can print money, but you can't print oil and wheat.

So, as Poszar concluded,Commodity reserves will become an important part of the Bretton Woods III. Goldman Sachs Group's forecast for oil prices also reflects that economic stagflation is in the "calm" before the storm (oil prices have fallen to post-conflict lows), which may be just the prelude to a powerful storm.

Although many people have predicted the birth of a new monetary system over the past decade, Poszar's forecast is slightly different this time, he says:

We are witnessing the birth of the Bretton Woods system III-a new world (monetary) order centered on oriental commodity currencies. This could weaken the Eurodollar system and exacerbate inflationary pressures in the west.