Oct 5, 2006

Gold and Oil

The one and only Richard Russell, editor of the Dow Theory Letters, on the recent gold price volatility:

Gold and Oil
-- The two most emotional items on the planet are gold and oil. The action of both have huge political implications. As a matter of fact, it's almost comical to read the emphasis now being placed on the action of oil and therefore gasoline. We're actually being told that if gasoline is in a downtrend and substantially lower by early November then the Republicans will win the elections. However, should oil be say over 70 by November 1, and the price of gasoline be heading higher again, then all will be lost for the G.O.P. Sorry, but I find all that to be absurd.

Gold and oil appear to be linked. The drop in oil from 76 to 58, I believe, has put a lot of pressure on gold. Declining oil is disinflationary, and disinflation takes any and all bullish pressure off gold. But the question I ask myself is this -- "Is it just a coincidence that the price of oil has dropped almost 20 dollars a barrel in the weeks before the election? Remember, the government controls a large stockpile of "strategic oil reserves." And various government spokesmen issue statements almost daily regarding the trend of oil. At any rate, I remain suspicious of the timing of the oil decline. I'll be most interested to see what oil does after the November elections.

Of course, OPEC has something to do with the price of oil, and from what I hear, OPEC wants the price to remain in the 60 to 70 dollar range. Already a few OPEC nations are talking about cutting back on their exports of oil. In this area, I'm watching Russia's actions with increasing interest. Russia is one of the world's major exporter of both oil and gas. And Mr. Putin is obviously using oil in his campaign to once again make Russia a competing "super-power."

So oil and gold, the two most emotional and the two most political of items. Gold, the only time-honored, outside-the-systems, money. And oil, the life-blood of civilization, at least until some other form of energy is created and placed into wide use.

For obvious reasons, politicians and particularly US politicians in power want both gold and oil -- down. And they will do whatever they have to -- to drive both of these items down. They may be successful for a while -- but only for a while.

I'm guessing that roughly 10% of my current subscribers were with me during the 1970s as we sat with gold during that great and wild precious metals bull market. At one point in that bull market gold dropped almost 50 percent, and speaking for myself, it took all my inner strength to sit with my gold. Subscribers today have a great advantage over those of us who held gold during the great bull market of the 1970s. Today you have the history of the 1970s bull market as a guide. Gold is highly emotional and is subject to brutal corrections, as the gold bull seeks to shake its riders off it back.

I've said all along that holding your gold position through the bull market is going to be a rough ride. Last week (at least I think it was least week) I wrote that the easiest way for the average investor to ride the gold bull market is to hold a certain quantity of actual gold. If you own the actual item, you are a lot less tempted to sell it. It's as simple as that. Let me put it this way -- you're better off holding 100 gold coins all the way through a gold bull market than buying $60,000 worth of GLD and getting knocked out (scared out) and disgusted a third of the way up in the gold bull market.

For the average subscriber here's a thought: you don't check the value of your home every day. You don't check the value of your spouse's ring every day. Maybe you're better off not checking the price of gold every day. One of the Beetles wrote a fine song, the song was entitled -- "Let It Be."

Gold down again today. OK, I want to talk coldly and unemotionally about the current gold situation. Natural gas is down, oil is down, copper just dropped, platinum and silver and palladium are down, soy beans are down, sugar is down, coffee is weak, housing is soft (even in Manhattan I understand housing and condos are starting to "give"). This is a disinflationary background, and it's a intermediate-term negative background for gold.

Those holding gold in nonphysical form have been knocked out of the box. It's as simple and brutal as that. Stop-losses have been hit wholesale. What we're seeing now is the slaughter of the many holders of "paper-gold."

Look, the long-term future of this country and in the central bank system is expressed in one word -- inflation. Ultimately fiat paper must fall. That's why we hold gold. What form we hold gold in is crucial. If you own paper gold you are vulnerable. If you own physical gold -- you OWN it. There is a difference. And in my opinion, it's a big difference psychologically.

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1 ΣΧΟΛΙΑ (COMMENTS):

Blogger Το σωστό να λέγεται ΕΙΠΕ (SAID)...

The stratospheric rise and drop of the price of oil, gas, metals, and other commodities was the result of high margin speculation of hedge funds in future contracts.
These were financed by private and public pension funds that were withdrawing their investments and profits from real estate investments.
This hypothesis was confirmed when the stock and bond markets got a flood of these monies exiting commodity futures and are currently making new highs. They will continue making new highs with no significant economic news as long as the hedge funds keep their speculative investments in the stock and bond markets.
Gold is a secondary player in these huge movements of investing capital.
Its usefulness is mainly in case of inflationary flare ups and times of world crisis.
I expect that the stock market but not the bond market will continue moving horizontally and slightly up till we know or get a best estimate which party will win these coming November elections.
I expect energy prices to return to their highs till the Iraq situation resolvew "mysteriously" itself or until new oil and gas pipelines to the West are completed.
The earliest possible time will be the summer or fall of 2007.

October 08, 2006 2:08 AM  

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