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Posts Tagged ‘gold’

1 Aug 11 2011 @ 9:36am by Matt Smith in Crude Oil, Economy, Global Energy, Natural Gas, risk management, Risk Strategy

What Would Winston Do?

In times of market turbulence like this, I find it useful to do two things: make simple observations, and seek solace in the wisdom of others. So this week I have turned to the most voracious voice of reason, Winston Churchill, to help me make some sense of this all. This is what he has told me: » read more

4 Jul 21 2011 @ 10:55am by Matt Smith in Crude Oil, Economy, Global Energy, Natural Gas, risk management

Commodities, Darren Clarke, Chinese Diving, and the US Women’s Soccer Team

For this week’s meanderings, there isn’t a music or cartoon theme in sight, for today…we talk sport. This past week has seen a number of breathtaking conclusions to some spectacular sporting events, which of course, have sent me trundling back along the path to energy. So here are three of the previous week’s events, lined up alongside their commodity compatriots. » read more

0 Apr 15 2010 @ 10:55am by Matt Smith in Capital Markets, Crude Oil, Global Energy, Random

Goldbugs and Black Gold.

Obligatory picture of The Clampetts

Alrightee, it’s time to dig into a couple of well-coined terms, take a look at two of the more currently favored investments in commodityworld(tm), and explain why the movement in one (gold) may help our view on another (black gold).  

So first up, gold. Gold prices have hit a new high for the year in the last week, and are building a charge towards a new all-time high. As for a goldbug, it is a fictional character, a supervillain who appears in Marvel comics an investor who is bullish on gold prices. Goldbugs can be, but are not always, rather pessimistic on the world or alarmist (= hoarding gold, cans of Spam, and shotgun shells).  

Come and listen to a story about a man named Jed, 
A poor mountaineer, barely kept his family fed,
  

Secondly, crude oil – aka black gold, Texas tea. ‘Black gold’ was coined as gold rush prospectors in the late 19th and early 20th century struck oil instead. Current crude prices also reached a new high for the year in the past few weeks (but are a long way off their record of $147 from July 2008). The reason for comparing and contrasting crude and gold is because at times they travel similar price paths, despite their obvious differences (ie my car can’t run on gold).  

Crude (red line), Gold (blue line), 2001 - present

Then one day he was shootin at some food,
And up through the ground came a bubblin’ crude.
  

So, what are the similarities? Both gold and crude currently have an inverse relationship to the US dollar (gold up, dollar down). Gold has held this trend for a good deal longer than crude, for which it has strengthened in the last few years as a weak dollar has been a symptom of a flight into riskier assets (a cheaper dollar has also fueled this flight into riskier assets). Both gold and crude are also seen as an inflation hedge. However, crude is likely to get much more beaten up in a deflationary (or disinflationary) environment, as it is tied to so many parts of the economy. Another shared trait is their high fund flows – investments du jour syndrome.  Nymex crude futures – the world’s most actively traded commodity contract – reached a record volume this week (April 13th), while the gold market is currently being scrutinized as to whether it is being manipulated, a classic signal of a hot market. 

Oil that is, black gold, Texas tea.  

Marvel-ous Goldbug!

As for their differences, investment in gold is known as a flight to safety, whereas crude oil (at least currently) is viewed as the complete opposite. Crude oil is consumed, unable to be traded again, while its demand is very much driven by economic strength. Gold’s availability (or lack thereof) is also a key differentiator; buying physical gold (eg, coins) commands a 7% scarcity premium over a paper trade. This also serves to illustrate that the gold market is a much smaller market than crude. In the cold light of day, the two commodities have very different supply and demand dynamics. 

So they loaded up the truck and moved to Beverly.
Hills, that is.Swimmin pools, movie stars. The Beverly Hillbillies!
 

So what can we learn from all of this? While gold is likely to remain supported in most eventualities – a recovery leads to inflationary pressures, renewed concerns encourage a flight to safety – crude will likely only benefit from the former of these two outcomes, and only if the US can rebalance away from debt-fueled consumption. But should forces conspire, it seems most likely these two may well finish the year scaling to new heights, leaving the vision of a poor mountaineer well in the past. Thanks for visiting.

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