Friday, June 1, 2012

Gold Up but Oil Down: A Mixed Message

Oil and gold are doing what they did in later periods of 2008 as well as last year.  Oil is breaking down while gold is moving up.  The gold:oil ratio is either about 20:1 (WTI) or about 17:1 (Brent).  Either way, gold is not historically cheap to oil.  There is clearly more room for oil prices to drop, both fundamentally and based on my reading of net short positioning  of the commercials in the crude oil futures market.  Thus as in 2008, a deeper low in the gold market is very possible (no guarantee), as people start really fearing deflation (perhaps).  More fundamentally, in recessions, people must pay their bills with currency, not gold, plus jewelry purchases decrease.  Finally, let's remember that the gold is now about 4X as expensive relative to U.S. residential real estate as it was when the ratio was at its minimum about seven years ago.  You can't eat either gold or a home, but you can live in the latter (or rent it out for a profit, or so you hope).  Value buyers are looking to homes this cycle for inflation protection, not only gold.  I think the financial markets will reflect this relatively high price of gold compared not only to houses but to metals such as platinum.

Thus I am looking at the action in the precious metals today as technical, under cover of the "they will print" POV.  But no U.S. recession is baked in the cake, and the current money flows into the Treasury market out of Europe and out of the global stock markets are probably sufficient to take the place of a new QE.

All recessions are deflationary (or disinflationary).  As regular readers know, I give ECRI's views more weight than the Street does.  Their WLI was down again today, and the multi-year trend is uninspiring.

If their U.S. recession call is correct while Europe works through its various problems, I think we can look forward to demand for commodities sharply diminishing.  For example, there is said to be a 2-year supply of platinum in ETFs, for which the public is paying storage costs.  LOL!  Platinum can go into deficit, plus what do you think happens to the demand for platinum jewelry in a global recession?  Platinum "could" fall a lot further from here.  Just look at the 2008 lows if you are skeptical.  Maybe it can't go so low, but sub-$1200 is quite possible.  I just don't see gold as a good value at its current price in that global recession scenario.  Message:  sometimes markets should be watched and not traded.

As I've been saying since January 2009, the U.S financial structure. has been developing as Japan did during its ZIRP period.  The zero bound has been a gravitational force, as it were, pulling the longer maturities toward it, with inflationary spurts during the expansion phase of the economic cycle. 

I still consider stocks as a whole to be overpriced.  OTOH, buy-and-hold investors are finally getting the chance to purchase a growing number of equities that are likely to outperform Treasuries on a multi-year basis, ignoring the fluctuations in between.  Hint:  think secure and growing income stream, a la BDX; or high and safe income stream even if it fails to grow ("we" think safe), as in ED.

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