Acute Phase of the Crisis: Gold, Oil and Yen

 |  Includes: FXY, GLD, IAU, OIL, USO
by: Gregor Macdonald

If you watch Gold and Oil you will have noticed the ratio between the two blew out close to an historic high this year, ending a run that began last summer. At the highs in the past few weeks, an ounce of gold purchased over 25 barrels of oil. This is still shy of the early 1970s highs, when gold briefly purchased 30-35 barrels of oil. Of course, oil scarcity then was completely artificial. So to see the ratio 35 years later come this far in an age of oil depletion is astonishing. It speaks volumes to what’s happened to global industrialism, and, to the catastrophe in the global banking system.

Few will also fail to notice that the price relationship also tracks the acute phase of the global financial crisis. Whether another acute phase lies ahead is unknowable but the recent turn in gold from the highs, and oil from the lows, suggests a pause has arrived. In addition, further confirmation that the chronic phase of the crisis begins now is the action in the Japanese Yen. The Yen serves a role that may even be greater than the carry trade. A proxy for global liquidity, the Yen is a form of global credit.

So to see the Yen make such a dramatic turn at the same time the Gold-Oil relationship has turned suggests that some initial bottom has been reached, in global industry. Perhaps global industry is due for nothing more than a blip. But Japan’s industrial production numbers are so horrific one has to ask if at least some moderate re-stocking phase lies ahead. Signals from the edges of global copper, fertilizer, zinc, and oil markets also suggest the severely depressed levels sustained over the past 6 months spell out cost-of-production pricing. My take would be that oil, especially as we are getting signals now of a demand revival, has been trading at a price that only reflects lifting and transport costs. As I have said the past 3 months, you’re really just paying for the costs of production. You get the 42 gallons of black goo thrown in for free.

Perhaps it’s just wishful thinking on my part that the acute phase of the crisis is now passing. That said, there’s not exacly alot to look forward to, should we move into the chronic phase. Also, it’s pointless to try and assert causality at this juncture. Did the Yen fall because the crisis was abating? Or does Yen weakness heal the wounds of the crisis? When I wrote the World Yen Flood post, I took the position that a weaker Yen would relieve acute stress in global banking. Since then, the Yen has indeed weakened dramatically, but, did the BOJ flood the world with Yen as I suggested? Or, did the crash in Japan’s trade surplus finally take its toll?