Wikinvest Wire

Pondering oil and gold prices

Monday, June 09, 2008

In the last post about oil and gasoline, this rapid fire sequence of questions was asked by Vespucian about gold:

1. Why do you think gold is only at $900?
2. With the dollar dropping the way it is shouldn't it be at more like $1,100+ right now?
3. Are the central banks dumping the stuff?
4.I find the current discrepancy between oil and gold odd. What's your view?
5. Could you do a post on it?
It might be easiest to work backwards...

5. Yes

4. I don't think there's much to be concerned about - it's best to just buy and hold the stuff and not pay too much attention to the week-to-week and month-to-month moves. I never really thought too much of the "oil-to-gold ratio" anyway. Most people would probably say that oil is overbought right now and if anyone can ever make any case for how you properly value gold, I'd like to hear it.

A few charts should help...

The United States Oil ETF (AMEX:USO) isn't the best proxy for oil futures, but it's handy, so, since the beginning of the year, it's been all oil, all the time:
And this is true if you go back one year to last summer - back then a barrel of oil cost about $65 and an ounce of gold cost about $650. Since that time, oil has more than doubled and gold has gained less than 50 percent.
But if you go back two years, all of a sudden, things look a little more even, much of this a result of the late-2006 energy sell off that pushed oil prices down to about $55 at one point.

It's interesting to note that the oil corrections have been much more severe than gold corrections.
If you go back to their respective lows of about $15 for oil in 1998 and $275 for gold in 1999, then today's prices represent gains of 900 percent for oil but just 300 percent for gold.

I think the supply outlook for oil (i.e., peak oil) is changing everything there is to know about oil prices at the moment - the average oil price last year was only $65.

3. I've heard practically nothing about central bank gold sales lately - the 400 tonne sale by the IMF is hanging over the market right now which may be keeping a lid on prices, but the move from $650 to the current $900 or so in the last nine months was a pretty big move.

It's too bad the central banks can't produce about 10 trillion barrels of oil as easily as they can produce 400 tonnes of gold - that would solve a lot of problems.

2. Going forward, the relationship between the U.S. Dollar Index and the gold price will become less and less important, but apparently it's still important to traders. I for one, think this relationship is overrated as the dollar and gold have risen together before (see 2005) but, admittedly, the biggest moves in the past have come when the dollar loses value against other currencies.

1. Gold is at $900 because that's where it is. It was much lower a few years ago and it will be much higher in another few years - that's how things work with fiat money systems as they work their way toward their eventual conclusion. I wouldn't spend too much time worrying about the month-to-month stuff.

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Anonymous said...

Price everything in gold and it will make more sense than in dollars.

Anonymous said...

Pricing everything in gold makes sense except for the period from about 1982 to about 2002. This period will be forever remembered as the "Golden Age of Fiat Money".

Tim said...

The "Golden Age of Fiat Money" - I like that.

dearieme said...

I've been looking at your blog for months now, Tim, and I have a bone to pick with you. Your title; "Mess" is too modest - how about "The Godawful Disaster Greenspan Made" or even "The Armageddon Alan Made"?

Anonymous said...

Is Armageddon Alan the Karma Chameleon? "I'm a man without conviction; I'm a man who doesn't know
How to sell a contradiction ... red, gold and green ..."

Lighten up all. We are on the verge of a worldwide religious experience.

Anonymous said...

Golden age of fiat money - great one! But, at the beginning you can't just say to people this paper is money. Who would take it? Money purely by fiat is an economic myth. The situation is more like how much credit can you pyramid on an ounce of gold before it all come crashing back down.

Vespucian said...

Thanks Tim!

tj & the bear said...

IMHO gold is a fear indicator.

Fear left the markets when the Fed "fixed" BSC. Fear will reenter it when it becomes obvious that the fix was a bandaid on a femoral artery rupture.

Got gold?

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