A Hidden Link Between Oil and Gold?

March 18, 2008 | By | 2 Replies More

Please first read the interesting comment sent to us by EK.

His email certainly raises some interesting and debatable points.

Dealing in the first instance with the (hypothetical?) situation he mentions concerning oil supplies and political deals cut with the OPEC cartel and the link with gold.

My first reaction was that this was yet another conspiracy theory raising its head and I have to say that on balance I remain unconvinced.

Even if a deal was struck those years ago, that it should remain in place to this day without breaking down or becoming public knowledge seems unlikely for at least two reasons.

Politicians could not be trusted to keep their mouths shut if an advantage could be gained over their political opponents, and we are not just talking about US politicians. As an example, during the period in question, the UK has had two diametrically opposed political parties in power.

It seems inconceivable that any deal would not have been leaked and reached the public domain. On the other hand such a deal would have no doubt been tied to the defense of the OPEC nations and could explain the commitment of the UK in particular to the US incursions into the Middle East.

I can only suppose that, if this theory is correct, then very effective gagging orders have been imposed upon the press in the US and any other nations party to, or benefiting from, the agreement.

The second doubt that I have is that there is a general awareness that we have passed the period of peak oil production so any thought that Iran could flood the market with cheap oil in the expectation of causing chaos in the US would be extraordinarily short sighted and self defeating.

For the majority of the period gold has been tottering around a bottom and despite some fluctuations the dollar has been reasonably strong against the other leading currencies and until the last year or so inflation has been relatively benign despite the question marks over the veracity of the official figures. I guess that Bernanke would give his right arm to go back to that scenario!

The IMF is having to raise cash to meet its commitments to the third world and to do so is selling off 400 tons of gold from its substantial reserves having had permission granted by the US to do so. It is considered, and so far has proved correct, that little or no impact on the price of the metal is likely to occur as the oil producing nations and China use their vast dollar reserves to buy into US businesses and buy up gold.

I cannot perceive any logic for the US to go to war with Iran on the basis that they would flood the market with cheap oil. Imagine the outcry from virtually every other nation if war broke out for this reason. In the most part they would benefit tremendously from a period of limitless cheap oil.

To sum up, my opinion, for what it is worth as I am neither an oil nor foreign affairs expert, on whether I cast doubts on the existence of such an agreement is irrelevant.

The world has developed at a rapid rate in the last five years and the old order is breaking down. Amongst the drivers have been the years of economic mismanagement that has led to the worlds predominant nation losing its way, the rise of what were the third world countries on the back of the falling dollar creating a developing recession in the US that no amount of money printing will halt.

I think that there is little doubt but that the recession will spread amongst the old traditional economies of the world.

Despite my doom and gloom prognosis I still think that there will be many opportunities to take advantage of the changing world stage.

Unlike the great recession of the thirties and following recessions we now have a variety of readily tradable instruments available to every investor however small, that can keep profits flowing however hard the times.

In my opinion there has never been a time when the following age old investment adages have been more appropriate.

  • Don’t put all your eggs in one basket
  • Buy the troughs and sell the peaks
  • The trend is your friend

Our reader who has sent in his most interesting and controversial comments expanding the link between oil and gold has been kind enough to express an interest in our articles on precious metals.

I note that he is considering putting his investment monies into the sector. I hope that he will take note of the first of our investment sayings.

I have followed the general principle of putting a third of my resources into stocks, a third into commodities and a third into property.

I am now out of property and expect to stay out for the foreseeable future; this has allowed me some extra cash with which I am playing the option market.

With an eye on the trend and another eye on companies deriving much of their turnover outside the US and Europe and trading with the emerging economies I am investing for the long term and garnering some additional income by selling the covered calls.

In other situations I am in the main simply buying puts for a short-term gain (or sometimes a loss!) Market volatility is the driver of option plays.

I have been and continue to be a keen buyer of gold via ETFs, buying the dips and holding on.

My attitude to silver and the PGMs is that I believe there is a slight extra risk factor due to their demand from industry falling off in a recession.

So my bullion buying resources go to gold on the basis that other PGMs may fall, with gold staying relatively unaffected, but if gold falls then as night follows day so will all the other precious metals. I am discounting any risk of government confiscation as I do not believe that this is any sort of a possibility in these modern global times.

I like mining ETFs to give me a good cross section of the industry, with the possibility of some M & A activity, and so that any adverse political developments may be mitigated.

Uranium, uranium producers and nuclear power companies are in my portfolio for the long term as I cannot see any viable alternative to meet the increasing worldwide energy demands and satisfying the green lobby.

Agriculture is near the top of my long-term investment strategy. The world is demanding more and better food as standards of living increase, particularly amongst the huge populations of China and India.

Again ETFs are my favored entrée to this sector. A note of caution, be very careful of any companies in the sector that derive the bulk of their earnings inside the US. Sooner or later whatever administration is in power, the futility of producing ethanol from corn will be realized and any political advantage in getting the farmers vote will be ignored.

That particular crash when it occurs will add an even greater pain to the already suffering average citizen.

Please feel free to send us your comments about EK´s email and our response. Rest assured we will be very interested and, unless asked not to, will publish your remarks with our response where appropriate.


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Category: Review

Comments (2)

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  1. David Oldham says:

    I cannot imagine that Bush or his successor would go to war with Iran after the disastrous consequences of Iraq, both politically and financially. I mean Bush is now looking pretty silly on all fronts, not least the failure to curb the excesses of the Greenspan era once BB took the reigns. He just made the entire mess an even bigger mess. Is there anything in his presidency we can congratulate. I dont see it.

    I can foresee diplomacy and great threats being made but I cannot visualise another war. The real war over the next couple of years or more will be to clean up the financial sector and try to restore some semblance of confidence. I think recession will be long and deep and wars will be a last resort to be avoided at all cost.


  2. John says:

    Thank you for your comments. What you say makes a great deal of sense.
    Please keep them coming.

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