Bruce Pile

Crude Oil and Gold: Not Worth Worrying Over

Many of the commodity ratios like gold/oil and oil/nat gas have entered a much different world the last two years or so. I don't think their decades old correlation is going to be the same anymore. Oil/gas has forever been changed by peak oil. If you look at the oil vs gas production curves at goodstockinvesting.blo... you can see why this is so. This chart also shows why nat gas, along with coal, has to be the bridge to our non-fossil future.

As for gold/oil, we have entered into a new monetary situation that has forever changed gold's role.

Gold Price Manipulation: So What?

Bank manipulation of gold pricing is one reason I am amazed that fractal gold predictions seem to work. How does fractal analysis factor in what the banks do and when they do it? But the fractal practitioners keep accurately calling the moves of gold anyway - see my blog post "Is Gold at a Fractal Moment?" (goodstockinvesting.blo...). Fractal analysis must have some built-in mechanism for anticipating big money selling or buying.

Gold: The Only Remaining Bubble?

Let's think about the bathtub thing:

"The inflation argument is one in which the inflationists are premature if not just plain wrong. The fallacy in the argument is in just looking at one action without observing the bigger picture. The analogy I like to use is a bathtub. The water is flowing, and the inflationists are fearing that it will overflow. What they fail to realize is that the drain is running even faster."

This is, in fact, a good way to think about the economy, money supply, and inflation. But the full picture can only be seen if you connect the drain back into the pump/supply circuit.

The water that is always flowing into the drain is thought of as "wealth destruction". But the investment markets don't really destroy wealth; they transfer it. For every loser in the markets, there is an equal and opposite winner. All that investment money is still out there, it has just changed hands many times since stocks were sold years ago, money was spent to build stuff, and so on. The "deflation" problem is that the money VELOCITY has suddenly been slowed way down.

That's why you have a pump, surge tank, and a complete circuit and an army of government analysts armed with rooms full of computers - to regulate this complex flow and keep the tub level (inflation) rising at the safe, optimal level of 2% a year lest we all get swept down the drain.

Investors don't destroy money. Banks do. You had money destruction in the Depression when most banks went out of business. Today, you don't have massive money destruction with FDIC. On the contrary, as a glance at any money supply chart now plainly shows, you have rabid money creation.

What has happened with the bathtub is this. We had a stable, smoothly running flow with our beloved 2% goldilocks inflation. Then along came the housing bust that created a violent surge down the drain. All the powers that be are now slamming open all the valves in the pump system and are even adding new pumps. Unless most of the banks go out of business, we will likely be facing some very tricky and dangerous tsunami waves of inflation. It's been pointed out that we are following a very similar sequence of events that Germany did in the 20's hyperinflation. Let's hope it all winds up being more stable than that.

As all this relates to the price of gold, we could get slammed with some deflation followed by inflation and then who knows what. What gold seems to respond to more than anything is monetary instability. And I think we've got plenty of that coming for some time. Splish splash.

As Good as Gold?

I agree that gold is too well liked now. It feels too much like the crowded end of the canoe, where you never want to be. It seems too obvious to buy. So I "feel" bad about gold, but I've found that when my feeling disagrees with technical condition, it is usually technical condition that later proves to be right.

As Good as Gold?

If you believe, as I do, that the markets have looked at more information than you have and have done more analytical thinking than you and have tossed aside the harebrained, baseless conclusions we may draw from that information, half of which are bullish and the other half bearish; then what you have is a look that is clearer than yours or mine with the error canceled out. All baseless, wrong conclusions drawn from all that information are just as likely to be wrong bullish as wrong bearish. After all, they are baseless - like flipping a coin. So the error cancels out.

This is why technical analysis works so well. It just looks at the results of all this high powered research. If you look at charts for the gold miners and compare them to the S&P 500, you see what I call a market break taking hold over the last month or so. This is where a stock or group has been moving in synch with the market but then peels away diverging from the ups and downs of the market. Gold mining stocks are starting to do that now. They have convincingly broken their 100 day moving average for the first time since their decline began as has the price of gold. Their A/D behavior also suggests a climb in the offing. It may be interrupted by more deleverage selling.

I haven't read everything I need to read on inflation/deflation, banks' buying or selling gold, mine production, and all the rest. But this one thing I know - the markets are smarter than I am! And they are smarter than everyone who has posted here.

Peter Schiff: Outlook for the Gold Market

I don't like to bitch. But are there some software problems for these comments that need attention? In my comment above, the closing quote on "instruments" was rendered "&quot...". And I've had a comment posted 3 times with just one click! Should the webmaster check that out or is it just the occasional stray electron?

Peter Schiff: Outlook for the Gold Market

To the point about all the money lost in the stock markets causing an equal amount of deflation: all that money did not disappear ! The market is a zero sum game; every dollar you make in the market comes out of some other participant's pocket on the losing end of a trade. It is legalized robbery ! When the market drops, the change in value goes to those were smart enough to get out early and who will buy near the bottom. You can play the ups and downs of the market the same as you play the ups and downs of individual stocks. You can pilfer the pockets of all the other players if you are smart enough. The market just acts to transfer wealth, not destroy it. Of course, in episodes like we have now, it feels like we're all losers and all our money has gone to the moon. But it hasn't.

So where does all the money go in a deflation? Well don't blame stock markets. Blame the invention of fractional banking, leverage, and fictitious money that relies only on the confidence of the public for its survival. The problem in the 30s was a banking problem and that's the danger now for deflation - the vanishing funny money the debt "instruments" have pumped into the world over the last 30 years.

Peter Schiff: Outlook for the Gold Market

If you look at a chart overlay with GLD and the S&P 500 over the last year (as you can do on Yahoo Finance charts) you see something interesting. All year long, the two display their usual inverse relation, gold going up while stocks go down and vice versa. Then in early August, the two start moving in unison! This continues until mid November. It is probably explained by the fund delevering that gripped both commodities and stocks. But then, the two return to their usual inverse relation. Over the big November 20 sell off, gold began a climb that has just made a decisive break of its 100 dma for the first time since its decline began in July. Stocks, on the other hand, are struggling to break their 50 dma. If the typical inverse relation is indeed back, this clean break by gold may signal another big leg down for the stock market.

Not that inflation is raging. The immediate problem of course is the start of a deflation spiral. The Obama administration will be forced to apply whatever stimulus is needed to stem a deflation. They feel that they can strangle inflation later with fiscal policy, but there is little that can be done with a deflation spiral. The market knows this and may want to run gold up well in advance of any actual inflation.

Gold vs. Oil

Gold could be starting a big catch up move to match oil's recent big move from about $80 to $130+. The things that usually follow oil (silver, gold, nat gas, and sugar) all look like they are preparing for take-off. However, I am growing a little leery of nat gas because it's simply too levered to the U.S. economy. The other three things are not.