Crude Oil, Gold Prices Plummet: Time to Get Cautious About Dollar Bears

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Includes: DGL, GLD, IAU, OIL, USO, XLE
by: J. Christoph Amberger

"Bad news from the Baku-Tbilisi-Ceyhan pipeline - an installation that may not normally draw much of your attention," writes Martin Vander Weyer in thye U.K.'s Telegraph, "but which is a throbbing artery of global energy supply, carrying vital oil supplies from Central Asia towards a tanker terminal on the Turkish coast. On some remote, sun-baked plain of Anatolia, an explosion sparked a fire earlier this week, temporarily cutting the flow through the pipeline. But guess what? Here's the good news: the oil price did not zoom upwards in response, not a blip, barely a flicker. Actually the price of a barrel of crude has been falling: from a peak of $145 in early July, it came down to $117 and was trading yesterday at $120. That's almost a 20 per cent drop in little more than three weeks."

Was it only a month ago that the rumbling stomach of Mahmoud Ahmadinejad, picked up by an inopportunely placed microphone, would have been interpreted as a viable threat to world oil supplies? Three weeks since the prospects of a rain cloud over the Gulf of Mexico was interpreted as a vital danger to U.S. crude and natural gas -- good for a $5-increase in prices?

Friday's news reminded me of an incident from January 9, 2007, when a U.S. nuclear submarine collided with a Japanese ship near the straits of Hormuz. Despite the proximity to the world's most important bottleneck, the oil price back then didn't blip. Even then, it was the holy trinity of the oil bulls' bubble creed that Peak Oil-China-Bernanke were the cause for rising prices, supported by the tryptophane troica of "Trouble in the Middle East - Hurricane Warnings for Next Summer - Nefarious Nodes of Nigeria".

The lack of response to an actual (if minimal) threat to supply support the thesis I have put forward here at TodaysFinancialNews.com for months, and most recently in a Smart Investing interview with Krista Das: Prices had nothing to do with supply and demand. The lube-job on oil was performed mostly by speculators, not traders. Desk-jockeys who don't really have the wherewithal to make an honest living trading oil... but who moved markets and commodity prices by electronically allocating assets to the commodity that promised the easiest reward.

Oil now is trading below $113. I believe that there is a very good chance that once prices fall below $110, we may see a rout as hedge funds cash out in a panic. This could reduce prices further at a rapid clip. Without actual large-scale terrorist activity, hot war between Israel and Iran, we may be back to prices around $70 by spring.

I'd not be surprised at all to see Ben Bernanke swing from whipping boy of the Hard Money crowd (because, obviously, he caused oil prices to go up by printing money) to whipping boy of the U.S. manufacturers and exporters (because, obviously, the resulting increase in dollar exchange rates makes the U.S. economy less competitive internationally.)

A look around the market indicates that not just oil is at risk, but almost all commodities buoyed up by the Commodities Super-Cycle. Demand destruction, mild as it has been so far, has not just occurred in regard to gasoline consumption -- but in regard to building materials like copper, concrete, lumber. A protracted dip in U.S. consumption will result in economic recessions not just in North America but Europe and Asia alike, affecting commodities from coal to indium. The result could be an avalanche of liquidation sales as hedge funds cash out on their hoards to return investors' principal.

Gold, too, has plummeted $130 in two weeks. Nobody asked me, but I'd say that makes for a terrible safe haven against inflation. This is the time to get cautious with your Hard Asset "gold-is-real-money" strategy!