Gold Hammered, Oil Slicked: Is This the End of the Resource Boom?

Includes: GLD, OIL, USO
by: J. Christoph Amberger

Crude oil prices are a hurricane stand-down away from breaking through $100... and gold is about to hit $750! What should you do as the commodities boom crumbles?

These days, I watch my stock portfolio with a sense of pain and excitement. Pain because of the obvious losses even the smartest stock picks seem to be incurring. (Although I prefer to look at this from a Bill Miller kind of perspective: If I'm down 10% and the S&P is down 20%, I'm "beating the S&P by 100%!"...)

Promise because I think that some of my investments -- made at ridiculously low prices -- have the potential to generate exponential not incremental gains, should the downturn ever end.

There is some small solace in the fact that few people are doing better. Real estate investors are paying good money on properties they cannot unload, increasing their cost base and reducing their margin with every check they cut. Bond investors are barely breaking even, depending on whose inflation rate you contrast their yield with.

Silence of the Bugs

And there's an eerie quiet among the gold bugs, who only a few weeks ago hawked gold as the panacea to the world's financial ills. Gold futures just fell to their lowest level in a year -- tying a seven-year record for a string of losses: Gold for December delivery fell $27, or 3.4%, to $765 an ounce on the New York Mercantile Exchange. That's the lowest level since September 2007. As I am writing, spot prices in New York have broken through $760 and are inching toward $750 an ounce.

That's bad news for anyone who has purchased gold in the last 12 months.

Mark Hulbert, whom I last met in an elevator with Bob Czeschin and Bill Bonner at a New Orleans Money Show, yesterday tried to characterize what sets apart a true "gold bug" from an optimistic gold investor:

A gold bug is someone who will remain bullish on gold, come what may. Perhaps the paradigmatic illustration of this attitude came from a newsletter editor I tracked in the early 1980s, who no longer publishes a newsletter and who I therefore will not mention to spare him any additional ignominy. When asked why gold had continued to fall, despite persistent predictions that it would rise, this editor said that it was the market, not he, that had been wrong.

(Coincidentally, it is exactly this stubbornness -- which I myself am certainly no stranger to when it comes to the American economy and global equities -- that newsletter publishers consider the hallmark of "good editorial".)

I was just discussing this with Sovereign Society's Jack Crooks on Tuesday: We both concurred that the old chestnut that short-term fluctuations in the gold price don't really matter, since gold supposedly is a "long-term hedge against inflation," is usually brought up when gold has fallen dramatically. I cannot count the number of times I have heard a particular price being touted as the "last opportunity to buy gold below $1,000". Especially since, except for a few days last March, every day for the past decades has been such an opportunity...

Looking at price curves and moving averages, it is difficult to make a technical argument in favor of gold and oil. This is especially since there has been a paradigm shift in regard to the dollar:

"We are experiencing a massive hedge fund panic into the dollar, and that hurts gold," said Ned Schmidt, editor of the Value View Gold Report. "This situation today is the capitulation of hedge funds on commodities."

This is exactly the scenario that supports further, protracted, and steep declines for both gold and oil.

Yesterday's events provided yet another indication that the supply-demand equation harnessed to justify oil's speculative über-spike since December no longer is valid... and maybe never was. Benchmark crude futures rose by just $3 a barrel in overnight electronic trading after OPEC announced it would cut crude oil output by 520,000 barrels a day. But after the International Energy Agency lowered global oil demand forecasts for 2008 and 2009, the October contract was down to $102.50 a barrel.

We are a hurricane stand-down away from breaking through $100.

OPEC's effort to maintain prices also left the upswing of the U.S. dollar unaffected, whcih rose to an 11-month high against the euro. The greenback increased to $1.4049 per euro, from $1.4133 on Tuesday. The euro has now shed 12 percent from its all-time high of $1.6038 in mid-July -- and is all of a sudden considered "still overvalued" by the same analysts who predicted the Demise of the Dollar just a few weeks ago. And China's central bank policies indicate that they're not eager to change this!

Which serves as a timely reminder that finance deals in cyclicalities, not linear progressions... and that today's lousy stock portfolio may be the equivalent of having bought gold in 1981... and oil in 2001 -- another good reason to keep your eyes peeled for Damn Good Stocks at bargain-basement prices.

Stock position: None.