Oil, Gold and the Holy Dow 39 comments
-
Font Size:
-
Print
- TweetThis
There’s something about the trinity of Oil, Gold and Stocks that catches the fascination of modern investors. I spent sometime last night looking at the correlation between these. Though, I have data on the prices of the three for the past 62 years (since WW II), in order to make this exercise relevant to modern times, I chose to do it from 1970 onwards. It was right after man landed on moon and the era of scientific, engineering and industrial evolution leap-frogged to levels only dreamt about before. From an analysis perspective, I chose to study the correlation between the 3 around the following data points:
A. Oil crisis of 1973
B. Stagflation of the late 70s (1975-1980)
C. The Paul Volcker effect of the early 1980’s
D. The Clinton years (1992-2000)
E. The dot-com bust(early 2000s)
F. Recent Times (2008)
Studying the patterns pivoted at the events above, I felt it’ll be an interesting exercise to see what distinct signals emanated prior and post these events and to see if anything interesting shows up. For the purists out there, this is just an analysis of the market psyche for these three investment types.
Looking at the two charts, the observations that bubble up are:
1) 1973
- Oil went up, so did Gold and the Dow stayed flat
- Gold grew at a higher rate than Oil
- Remember, gold had an advantage in 1973 as in 1971, President Nixon abandoned the Bretton Woods regime and suspended the dollar’s peg to gold as U.S. fiscal deficits from overseas spending caused a massive drain in U.S. gold holdings.
- Oil got denominated in dollars after the 1973 crisis
2) Stagflation of late 1970s
- Oil and Gold continued to flourish, Oil more so while the Dow remained almost flat
- Gold and Oil peaked in 1980, Dow barely moved
- Inflation rose to 13%, oil prices were high and pegged to the dollar
3) The Paul Volcker effect of the early 1980’s
- Volcker’s method of bringing inflation down through high interest rates had a positive impact to the Dow, Dow started trending up and Oil and Gold prices came crashing down
- Gold was impacted more severely than Oil. Oil has geo-political sentiments associated with it, which often times works to its advantage
4) The Clinton years (1992-2000)
- Dow loved these years and grew at an astonishing rate
- Interestingly Gold and Oil stayed flat and didn’t go down
- Towards the end of Clinton’s term Oil prices grew and Gold stayed flat, starting the downward trend of the Gold/Oil ratio. This may be due to one of many factors: Geo-political reasons, increasing demands, limited supply, anticipation of a President who supported the old economy? I don’t know but I definitely need to understand this better.
5) The dot-com bust:
- This brought Dow down and Oil and Gold again took off. 9/11 had just happened and wars were being fought and war plans being drawn. As a result, Oil which is very sensitive to these events had a much steeper increase. To Gold’s credit, it grew at a pretty decent rate while being resistant to political events.
6) Recent times
- Gold continues to grow at a slightly slower rate than before
- Oil is growing very steeply, as we all know
- Dow is down to 2003 levels
- Gold/Oil ratio is trending down mainly due to Oil’s magnificent climb (unfortunately)
Inferences:
- Economics which used to favor Gold before are more skewed to Oil now. However, the Gold/Oil ratio has stayed nearly constant in the past 38 years. Given this, it may be inferred that quite possibly, Gold will go up and Oil may go down in the next few months to maintain this historic equilibrium.
- Increase in interest rates and curtailing of inflation historically drives the Dow higher.
- When Dow goes up, it curtails the price of both Gold & Oil albeit it has a much stronger influence on Gold than Oil. Oil prices can go up even when the Dow’s flourishing due to the ultra-sensitive and political nature of the Oil supply-demand equation.
- When the Dow starts trending down, Gold’s a good investment. Get out of Gold (unless it’s your portfolio hedge) when Dow starts to rise.
- Oil has a much stronger influence on Dow than Gold in the recent times. Oil hikes drive Dow down and that in turn drives Gold up. There’s a lag time here which surfaces a good investment opportunity if you are considering Gold.
I don’t own any Gold stocks and this analysis is driven by my personal quest to understand the correlations between Oil, Gold and Stocks with market conditions. Make your own inferences and do let me know if you see anything else of interest in the two charts.
Related Articles
|
Find People on SA
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largest
increase in followers
in the last 7 days-
1
David Fry
-
2
Bill Gross
-
3
Philip Davis
-
4
Tyler Durden
-
5
TraderMark
Fastest Climbers » -
1
-
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most activeSee all
Instabloggers.
Top Instabloggers » -
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 39 comments:
Gold came down roughly 75% from its highs, just like oil did.
Ah, the Clinton Years, the Post War Bubble was just beginning, the Government used Russia's collapse to ravage the Military and freed 100's of Billions from their programs to thus building the Illusion that it was the strenght of the Economy that had created a Balanced Budget. The Bubble that was the internet was 100% "pie in the sky"
Subtract Iraqi funding from the start to the present and there would have been a balanced budget long ago. In Rebuilding our Military plus the War, we went full circle.
There are 3 Bubbles within a 10 year time frame though some think that the Mortgage/Financial Bubbles are one and the same.
This is a unique situation, unwinding this mess will take years. The amount of money trying to rectify the situation will keep the dollar weak. Money Supply will continue to rise. Even if the Fed hikes rates, the amount of new dollars pouring into the world will not keep the Dollar strong. Hence the Flight to hard assets.
1. Huge unprecedented amounts of fiat, printed dollars, have entered the liquidity pool and have depreciated the dollar to extents not even realized yet. Even with higher interest rates this weakness will manifest itself and the economy with inflation will suffer.
2.Oil has peaked and the Grasshopper played. Now we are totally unprepared for an ongoing accelerating Global oil shortage and this will also serve to drag all the World under.
Tough times ahead and no easy Rx.
> jack
Gold seems to have reached some sort of equilibrium, at least temporarily. The world is awash with dollars... and counting. And the balance of oil supply-demand is precarious at best, unlike previous years when there were excess supplies available.
None of these trends bode well for our future, either. Unless we find some magic bullet to operate our vehicle fleet, oil prices will escalate over time, especially if there is a supply disruption. Too many dollars will continue to deflate our currency and monetary solvency, and the price of gold will ultimately escalate.
The wild card may be of all things U.S. exports. If the dollar gets cheap enough, this will eventually restore our manufacturing base. This trend has begun to occur already. So maybe we'll become more like Mexico than Canada.
The dollar (...the new peso?) won't be worth much, but at least everybody will be working making products for export and in domestic energy exploration.
Supply - we need to drill here and now. The Democrats in Congress are destroying the economy by holding up drilling.
Speculation - make the oil companies price their own product, like every company outside the commodities does. Create price competition. At least don't let people who aren't buying oil bid up its price.
Spending - out of control govt. spending and no leadership on fiscal responsibility causes a big part of the weak dollar.
I can answer that one for you...
Yes, annual inflation exceeded 15% in the late 1970's. Unlike now, however, there was rampant wage inflation, as well. (We may owe this benefit to our friends from Mexico, by the way.)
Some notable economists have begun to argue that revisions in the CPI made since then have masked the rate of domestic inflation, and it has reached double digits already. I don't know.
What I do know is this trend doesn't bode well for our future economically. It took the Reagan-Volcker Fed several PAINFUL YEARS to repair the damage caused by having too many dollars in circulation, and that was a picnic compared to the "easy money" we're seeing now.
Freddie-Fannie and a host of CDO's and credit card debt, coupled with no savings and negative balance of trade was not there in the past to bring down the Sky as it is now.
But not to worry: Our Neros will talk it to death till tomorrow when it will be just about time to tune up the Fiddles.
Between the lines of Obama speak -if you pay attention--you will hear the ominous sounds of a great, Pie-In-The-Sky Socialist experiment!!
Few nations have ever restored fiscal integrity once double digit inflation sets in without having their currencies become virtually worthless first. And there is at present no political leadership in either party that appears up to the task. Hell, they don't even realize what's going on, much less taking steps to combat it.
Unfortunately, this time the canary in the coal mine is US!
1. Starve us for oil, and make us dependent on government for what, how, and when we drive.
2. Keep us from investing in commodities, which is our only useful hedge in personally overcoming inflation.
The master plan is already underway!
The only thing the "useful idiots" haven't considered is our history of defiance and ability to overcome despots. But it promises to be a real test for sure!
I really haven't the inclination to debate Economics 101 with you.
Yes, it must be the "trickle down" economics. Never in the HISTORY OF THE WORLD have so few lived so well. One in 1,000 Americans is a millionaire. 10% of taxpayers already pay 90% of the taxes. And corporations don't PAY taxes in the first place, they simply COLLECT them.
Here are some titles you can read to help you come up to speed on this subject, assuming you may want to: The Road to Serfdom, The Wealth of Nations and Free to Choose. There are no great ones arguing the other side, except Mao's Red Book and Marx's Das Kapital (...which serves to illustrate my point).
There's also another which is interesting. Alexis de Toqueville was a Frenchman who toured America in the 19th century and marveled at our freedoms and economy, which are ONE IN THE SAME, incidentally. He concluded that our experiment would propser until we figured out how to vote oursleves the proceeds of our Treasury.
And that's precisely the road we're embarking on today, my friend.
Sure, sure, they will say they inherited it. Bush 1 had a economic recovery that wasn't noticed until after Clinton took over. Clinton inherited it. Boy, he really did a good job...so quickly.
The Bubble Balanced the Budget? Gimme a break. Without the Cold war's demise, the spend and spend more Democrats would have destroyed any budget. With it, they spent more but it was hidden by the destruction of the Armed Services.
The nitwits in Congress are going on their summer break (...break from what, you may ask?), without even addressing $4 a gallon gasoline and $5 diesel for the trucking industry.
It's been said before but is especially cogent here... We get EXACTLY the government we deserve in America, EVERY TIME.
Much better than CNBC where everyone is learning "Hucksterism 101"
No-one noticed??? It did "trickle down" ---To China; In return for lead painted toys, poison cat food and drug ingredients that kill.
And for that we get to pay 20% on our Credit Cards!!
Now the poor banks are crying for some -(more tax-money)-bailout bucks!! I'd rather see those bums-- (who are suffering with their own self made toilet paper)--In-Jail, rather than-In-Tact, with their ill gotten gains.
That'll just bring the Helicopter with more Zimbabwe Zeros that hurt everyone. Ben is going to fix our economy!--sure!!--he cares about, recession, inflation, unemployment, and the economy---SURE!!!
My friends, It's Bankers--Helping --Bankers!!. And if you don't believe me, just ask Paulson---remember what pot his roots are in!
hey, girls, it's just portfolio insurance! add gold to your list of insurance policies a rational person needs and forget about it.
Then we all go buy a wheelbarrow for our fiat dollars.
Other than the legacy students, like the Kennedy or Bush children, it is exceedingly difficult to get into any Ivy League school. You have to have straight A's and almost perfect SAT scores to even be considered for admission.
So there's no question that students like Obama and Hillary KNOW their history, unlike so many of their constituents. Moreover, they read and discussed the works of Adam Smith, Milton Friedman, Schumpeter, Hayek, and even Marx and Mao, among many others. They learned about the governance of Hitler and Stalin, the mistakes of Chamberlain and the heroism of Churchill.
So what did they do with such a first class education? Pander to the masses, create more "government programs," and tell everyone there's "something for nothing," which is precisely antithetical to what their own observations taught them, that's what.
Allow me to cite an example. One of Obama's favorite campaign themes is a new college tuition program that would pay kids $4,000 for 100 hours of community service. The merits of this wacky idea aside, that's a pay rate $40 AN HOUR for doing virtually nothing. Heck, no wonder they idolize him... that's several times more generous than even my son's mother! All that's doing is teaching our children how to GAME THE SYSTEM, which is the last thing they need to learn more about.
I don't blame the people who vote for Democrats, then. Most union leaders and the members of their brotherhoods, welfare mothers, Hollywood Stars and guilty suburbanites just don't know any better. But Obama and Hillary know full well how wrong the message they're sending to our society is, and they do it anyway!
We are all indeed on "The Road to Serfdom". We may have a few more rich people, but will have a lot more poor, and no middle class.
Do you really want to live in a guarded enclave like they do in the Third World?
You can pay your front rent with Obama, or pays your back rent with McCain, but you are going to pay. It's not possible for 10 % of the population to pay 90% of the taxes; this is an Urban Legend.
If you make more than the average wage in the US (40 to 45K/year)
you will pay more.
The only way taxes really ever go down is to cut spending, but I have yet to see this happen in my 53 years of existence on planet Earth.