Gold’s Link To Oil

December 2, 2008 | By | Reply More

Back to square one, well not quite. After last weeks long awaited break out gold has fallen back by over $40 an ounce dropping to below $765 before staging a slight recovery to just over $771 in mid Tuesday morning trading in Europe.

Gold’s link with the price of oil comes forcefully back into the reckoning together with the latest strengthening of the dollar against the Euro and Sterling.

Treasury bonds are the flavour of the moment as they continue to prosper in the flight to safety that has traditionally been the prerequisite for gold.

We suppose that the reasoning may have something to do with the fact that gold earns its holders no income whereas treasuries are yielding a little something and are backed by government.

It is difficult to argue against this logic; particularly in the short term and even more so if you are in the deflationary camp.

Europe looks set to lower interest rates yet again, accounting for some of the dollar’s strength. There is also the perception that the US is better placed to weather the storm of recession than Europe and many other countries.

That is not just down to ‘good ole Yankee know how’, labour practices are less restrictive in the US, it has more available natural resources than Western Europe, and perhaps psychologically of greater importance, US citizens are more patriotic, despite having little faith in their government, than their European counterparts.

Not forgetting that the optimists are looking forward to a new administration that they hope will come up with solutions.

Given these factors it is understandable that the dollar and US guaranteed bonds are finding support amongst Americans.

Gold has also suffered from falling demand in November from India, the world’s largest consumer. Purchases fell by over 25% from a year earlier, not helped by the Mumbai terrorist attack that closed trading for the last four days of the month.

To add to the confusing mix the US Mint has announced that they would only be minting one ounce gold and silver American Eagles in 2009 to be sold by allotment only to appointed dealers.

No other denominations are to be made until further notice and interestingly this includes Platinum American Eagles. So the shortage of physical precious metals is expected to continue into 2009.

Reports that annual gold production is still falling with the decline likely to accelerate as rising costs result in mine closures and development and exploration activity grinding to a halt.

How long will it be before OPEC makes a dramatic cut in oil supplies to meet the objective announced by one cartel member of $75 a barrel? Our bet is before Xmas.

If the gold to oil price ratio stays within its historical bounds then we can expect gold to march back up.

We also suspect that the present deflationary pressures in general will not last for very long, becoming restricted to non essentials and over inflated assets such as houses, commercial property, art, etc.

In which case the immense amounts of paper money, much of which is already being conjured out of thin air, that governments continue to create in attempts to support the ailing economies of the world must before long result in inflation of epic proportions.

Surely then the meagre yields of treasuries will hardly dent their loss of dollar value, leaving gold as the only viable alternative to safeguard wealth, a role it has so often taken over the centuries.

Our expectation that, last week, gold had started a long overdue steady climb back towards $1000 and over have been dashed but we are hopeful that this will prove a temporary blip before the natural order of wealth protection in times of crisis reasserts itself.

Our comfort is that gold and silver prices have remained relatively stable compared with the ongoing collapse of stocks.

Gold and silver investors have not had the same exposure to risk and losses as other investors, the pity is that the producers of these metals have yet to show the same resilience.        

 

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