Gold Oil and Currencies

8/14/2019 Gold Oil and Currencies

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Gold, Oil, Fiat Currencies, & Where We’re Headed This is a little different from my other Scribd postings, perhaps this is the beginningof a blog. I don’t know, I don’t have the time to write a blog consistently and since Iprefer charts & graphs, blogging isn’t in my future. But we’ll see how this goes.

At any rate, a number of things have crossed both my screen and desk the past fewdays. So I wanted to take a step back and do something people just don’t seem to doanymore: step back, assess the big picture, and see what we can gleen.

A lot has been made of the Fisk story in The Independent earlier this week. Withreporting like this, can you blame people for making a fuss?

‐ Robert Fisk “The demise of the dollar” The Independent – 10/6/09

It sounds bleak, and it gets worse.

‐ Robert Fisk “The demise of the dollar” The Independent – 10/6/09

For kicks and giggles, I put the following table and chart together. First, the chart.It’s a 5 year daily chart that shows gold in terms of dollars, oil, euros, yen, andreminbi. I indexed price levels back to the 10/6/04 level to create an index by whichto compare relative price movements. Take a look at the next page to see the chart.



Gold vs. USD, Oil, EUR, RMB & JPY

0.00

50.00

100.00

150.00

200.00

250.00

300.00

350.00

400.00

1 0 / 6 / 2 0 0 4

1 2 / 6 / 2 0 0 4

2 / 6 / 2 0 0 5

4 / 6 / 2 0 0 5

6 / 6 / 2 0 0 5

8 / 6 / 2 0 0 5

1 0 / 6 / 2 0 0 5

1 2 / 6 / 2 0 0 5

2 / 6 / 2 0 0 6

4 / 6 / 2 0 0 6

6 / 6 / 2 0 0 6

8 / 6 / 2 0 0 6

1 0 / 6 / 2 0 0 6

1 2 / 6 / 2 0 0 6

2 / 6 / 2 0 0 7

4 / 6 / 2 0 0 7

6 / 6 / 2 0 0 7

8 / 6 / 2 0 0 7

1 0 / 6 / 2 0 0 7

1 2 / 6 / 2 0 0 7

2 / 6 / 2 0 0 8

4 / 6 / 2 0 0 8

6 / 6 / 2 0 0 8

8 / 6 / 2 0 0 8

1 0 / 6 / 2 0 0 8

1 2 / 6 / 2 0 0 8

2 / 6 / 2 0 0 9

4 / 6 / 2 0 0 9

6 / 6 / 2 0 0 9

8 / 6 / 2 0 0 9

I n d e x

( 1 0 / 6 / 0 4

= 1 0 0 )

GLD/$ GLD/Oil GLD/EUR GLD/RMB GLD/JPY

To me, this is simply a dollar punt. The dark blue GLD/$ line represents the dollarprice of gold and you can see the dollar has weakened more than the othercurrencies. It’s not that the Japanese, Europeans, and Chinese have done better jobsmanaging their economies fundamentally, it’s simply that right now the worlddoesn’t want to hold dollars. To me, it’s more of a tell regarding market psychology

than anything else. One other thing to think about: gold in barrels of oil. It’s onlybeen in the past year where you can see a pronounced move higher in gold vis‐à‐visoil. So I thought I’d include this chart that shows that. This is a 4 year daily chart of gold priced in barrels of crude. Note how stable this ratio has been up until the past year.



Gold Priced in Barrels of WTI Crude

09876

Source: Haver Analytics

30

25

20

15

10

5

30

25

20

15

10

5

Another way to look at the data here is to look at a correlation matrix that looks at the indices. The table below shows the correlations between all of the indices:

But what else is going on right now? The dollar’s demise is thoroughly playing itself out in the press, but it’s not the only story. Well, for starters, we can juxtapose thedeath of the dollar with some comments I saw from Mark Sunshine on a post at riskcenter.com



‐Mark Sunshine “And Now for Some Really Bad Economic News…” www.riskcenter.com – 10/6/09

Here are some charts of the money supply metrics Sunshine is talking about. First, isthe monthly chart for velocity of money.

Velocity of Money: Ratio of Nominal GDP to Money Supply M2

Ratio

098765432109

Source: Macroeconomic Advisers/Federal Reserve Board/Haver Analytics

2.100

2.025

1.950

1.875

1.800

1.725

1.650

2.100

2.025

1.950

1.875

1.800

1.725

1.650

Next is a chart of the M1 money multiplier:



To get the dollar collapse we would need to see a for a hyperinflationary scenario totake hold, demand for something would have to spiral out of control so fast it wouldcause the indicators Sunshine wrote about to reverse course. I don’t know what it would be, but I do know that it probably won’t be gold. And unless people want tostart building grain silos, or oil and gas storage facilities, it won’t be some othercommodity.

Putting it all together, it seems there are two things I can take away from all of this:1) It’s inevitable to me that the forces of deflation we see in the monetary aggregatedata and the market’s perception of dollar hyperinflation are on a collision course.The monetary aggregate data points to a strengthening dollar while the price of goldindicates a weakening one. 2) When looking at gold’s price moves relative to crude,it’s way overdone. The ratio of barrels of oil to an ounce of gold is double what it hasbeen for the part 4 – 5 years. If you believe in mean reversion, that means one of twothings has to play itself out: oil has to start heading higher or gold is headed lower.Either way, it speaks to a possibility of seeing crude outperform gold and the tradeto put on here would be to skewed to playing crude to the long side and gold to theshort side. And nobody can seem to make a case for a strong move to higher crude

oil prices, we could see a lot of long gold positions put on over the past 6 months get wiped out.

One other thing to think about is this: there are lot of prognosticators that believegold is headed to $1,500 ‐ $2,000 an ounce. Not a lot of folks have talked about atimeframe for the move or if there’s a move back to $850 along the way to theirprice target. Since risk is always two‐sided, it begs to ask how long it will take to get to those levels as well as the trajectory of the move. I have a sneaky suspicion that



the gold trade has gotten awfully crowded now and the next big move is actually tothe downside – not up.

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Gold Oil and Currencies