Crude Oil and Gold Still Joined at the Hip: Something Has to Give
Commodities / Gold and Silver 2012 Sep 06, 2012 - 02:21 AM GMTBy: Andrew_Butter
This is a chart of the price of oil and the price of gold, superimposed:
Eyeballing there is a sort of correlation, take those lines back to 1975 when gold was pretty much allowed to find its own level, leaving aside the accusations (so far not proven) that central banks manipulated markets to keep the price of gold down…there is a 75% R-Squared; which in Plain English means that 75% of changes in the price of oil since then can be explained by changes in the price of gold, or the other way around.
Of course that doesn’t mean that’s going to happen in the future and also that information does not tell you whether (in the past) the price of oil drove the price of gold (a) or the other way around (b), or even if the price of both of them was driven by something else (c).
My opinion at the moment is flip-flopping between (a) and (c), I’m sort of favoring (a), but starting with (c); there is a really good correlation between the price of gold (in dollars) and the amount of money America borrows from foreigners…mainly to finance its current account deficit.
That’s the government via mainly selling US Treasuries to foreigners, plus the private sector…if you can still call the American banking system “private” anymore, selling other types of securities. Like selling collateralized debt obligations to foreigners who don’t speak very good English and have trouble reading the small-print. Although on that score, the word does seem to have started to get out that when you shake the hand of a “God’s-Worker”, which is how employees of Goldman Sachs like to be addressed, you’d better count your fingers afterwards.
Two things that the price of gold does not seem to correlate with very well, are CPI or any other measure of inflation, or the money supply in USA, however you like to measure it. The thing about correlation is that when there is one, that doesn’t prove you found something, but when there isn’t a correlation; that pretty much proves there isn’t a connection. So the hyper-inflation camp that says QE-X is going to cause gold prices to go up through the roof doesn’t have much evidence based on reality to back that idea up.
The thing is, the main driver of the current account deficit is not really Chinese and other types of sweat-shop workers, although that helps, it is America’s huge dependence on imported oil, which in turn is driven by the fact there are only two things that can 100% make sure a US Presidential candidate will not get elected.
Those are (a) suggesting that bombing Iran back to the Stone-Ages is not an urgent priority, and (b) suggesting that Americans should pay more for gasoline to pour down the throats of their pick-up-trucks, notwithstanding that the amount of oil America uses to produce a dollar of GDP, is twice the world average, and the tax collected on that no-way compensates for the economic damage of being beholden to foreigners so as to be able to buy enough oil.
So perhaps that’s it, the money America borrows to pay for importing oil, causes the price of gold to go up, exactly why that is might be because money loaned against promises is worth less than money loaned against real things, and gold is real money.
So what’s happening now? For almost a year the price of gold went no-where, also the price of oil pretty much flat-lined.
Well one thing that happened was that America’s oil dependency went down, first because it started producing (a little) more and second because it started consuming (a little) less.
http://www.marketoracle.co.uk/Article35377.html
The other thing is that the discovery of new ways to get natural gas out of the ground, has led to an over-supply, prices are rock-bottom. There are ways to use natural gas to replace oil, all the buses in Korea run on natural gas, trucks and trains can run on natural gas also, and in fact so can automobiles, although that doesn’t leave much room in the back of your pick-up for RPG’s and the ammo for them, that are apparently a vital accessory for any True-Blood.
Right now, the infrastructure isn’t there, also because there is practically no tax on gasoline, and no tax breaks for doing conversions, no-one is switching.
But it is possible that once the US government finds a solution to what they consider the pressing problems of state, such as plans and contingency plans to bomb Iran, someone might get around to thinking about the cost-benefit of America not being dependent on foreigners largess so they can drive to work in the morning…miracles do happen.
So perhaps there is an expectation in the market that America might one of these days do something about their current account deficit, particularly in relation to the amount of money they have to borrow from foreigners, in order to pay for importing oil.
And that expectation might be what is cooling down the price of gold?
One other thing, according to me, oil is in a bit of a bubble now (not a lot of people agree with me).
http://www.marketoracle.co.uk/Article34980.html
OK I’ve being saying that for a year, and although I did call the inflections correctly, the price never went down to what I call a true-pop price. I suspect that might have something to do with the Bomb-Bomb-Bomb-Bomb-Iran brigade, who apparently didn’t work out quite yet that the “unintended-consequence” of that would likely be a huge spike in the oil price.
So, sorry to sound like a broken-clock, but for me oil prices are going to need a “pop” before they can get back to their current other than market value (some people call that their fundamental fair value, personally I don’t like the word “fair” in that expression because there is nothing “fair” about value). Either way, I think that’s about $90 (Brent) right now.
The other thing that line of reasoning gets to, is that gold has been a bit of a bubble since 2009, or if you are an Austrian the dollar has been in a bit of a bust compared to “real-money”, i.e. gold.
Eyeballing the chart, I wouldn’t be surprised to see gold under $1,000 in the next two years, and yes I know that’s a real minority view.
By Andrew Butter
Twenty years doing market analysis and valuations for investors in the Middle East, USA, and Europe. Ex-Toxic-Asset assembly-line worker; lives in Dubai.
© 2012 Copyright Andrew Butter- All Rights Reserved
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