when will oil and gold decouple?

[jk]

i am quite skeptical of the "decoupling" that's been hypothesized for global equity markets: the idea that asia and em's will somehow hold up in the face of a u.s. recession. however, there is another decoupling i think may be in our future, and i would be interested in others' thoughts on this issue.

i think we are in a recession which will worsen over the next 6 months at least. as the evidence of recession deepens, i expect deflation fears to re-emerge, as they did during the last recession. in the setting of global slowing, i would think that industrial commodities - metals and energy - will sell off. my question/thought- can gold decouple from oil?

we have seen charts showing that the rise in the price of oil has been a money illusion- in gold terms, oil has been flat for a long time. but in a recession/deflation scare energy demand will drop. some investors, however, will look beyond the valley to the monetary stimulus still in the pipeline, and buy gold.

this same phenomenon is happening now. as evidence of economic slowing comes in, equities drop and gold goes up. it was not so long ago that gold and equities seemed to track together- now they have decoupled, with the same dynamic. that is, gold is seeing the monetary stimulus still to come in response to signs of recession.

so when will oil go down, reflecting its relationship to economic activity? and if slowing is severe enough to indeed drop the price of oil, will gold still see further into the future, and decouple from oil? or will the deflation scare be severe enough to drop the price of gold, and provide the last big buying opportunity before gold takes off once more?

[grapejelly]

Re: when will oil and gold decouple?

If "money" continues being created at an astonishing rate, then why should oil fall in price much? Why shouldn't it increase in nominal price? And perhaps industrial commodities won't sell off for the same reason...

To change the famous advice by Mr. Robinson in the Graduate, "tangibles"...

I mean, real estate would have been the haven for wealth seeking a return but that isn't an option these days, so perhaps the real estate slide/crash will result in more of that capital flowing into tangibles.

I do think there is an enormous deficit in oil investment. The reason is that unlike past times, today most oil companies are owned by governments. The caretakers have no reason to re-invest and every reason to exploit their assets while they are in office. One of the most troubling aspects of "democracy".

So oil becomes a refuge for capital just as gold is. For this reason, I don't see a decoupling happening.

[Sapiens]

Re: when will oil and gold decouple?

jk,

In my opinion, when there is a break in the chain of payments, leading to a panic. One major company out there will default, leading many to seek safety in Gold. Also, don't discount a political event ("war").

The Financials are insolvent, they know it, we know it. Banking is a confidence game, and they are doing their very best to keep the public in the dark.

Patience my good man!

[BiscayneSunrise]

Re: when will oil and gold decouple?

jk,

As for the ROW (rest of world) economy decoupling from the US, I think we are close but not there yet. Plus ROW is suffering from many of the same excesses of the US (loose capital, over inflated real estate, need time to digest much of the past few years growth) So US woes will probably affect ROW. What is interesting is that if the US doesn't consume as many imports as previously, that will force foreign suppliers to accelerate their development of emerging markets all the more aggressively. Getting the US economy more marginalized.

As for the future of oil, even if the world economy slows (remember we're talking slowing not reversal), we'll still see about significant overall increases in the demand for oil and energy. Additionally, Investors Business Daily today suggested that oil is becoming an inflation play in its own right (page B10). In the late 1970's/early 80's, gold and oil rose and fell together, whether or not is was coincidence, I do not know, but they were closely correlated back then.

To Eric's point on another thread, it is probably much easier and less risky to just invest in gold and be happy, rather than be subject to the whims of the markets. I do believe that the worlds economy may do rather well; after all, it is hard to stymie the ambitions of 7 billion people, but the behavior of the equities markets are another matter entirely. A modest slowing of the world economy is being greeted with a high degree of negativity in the US equities markets.

I tend to let the direction of the markets be my guide and thus far the markets are being very kind to both gold and oil.

[c1ue]

Re: when will oil and gold decouple?

Oil historically has taken years to reduce in nominal demand - I'd not expect significant decoupling due to a US recession until at least next year. This is with the assumption the recession started August 2007.

As Sapiens noted, however, if (when) a top 10 bank fails, then this would accelerate the decoupling time table but only because the investment gold portion will shoot up.

As a side note - I was having a drink with a couple of female friends last night; one from Brazil and the other from Italy.

It was amazing how their grandparents all fervently believed in gold, but their parents believed in dollars.

From what I can tell, the girls seem to be swinging back towards the gold side. Both have family in their respective countries and are aware enough both about inflation eroding their incomes and the value (less) dollar when going home.

[raja]

Re: when will oil and gold decouple?

but in a recession/deflation scare energy demand will drop. some investors, however, will look beyond the valley to the monetary stimulus still in the pipeline, and buy gold.

so when will oil go down, reflecting its relationship to economic activity? and if slowing is severe enough to indeed drop the price of oil, will gold still see further into the future, and decouple from oil? or will the deflation scare be severe enough to drop the price of gold, and provide the last big buying opportunity before gold takes off once more?

I would think the answer to your first question lies in how oil is used. My impression is that it's used primarily for driving and home heating . . . but perhaps someone who knows more can chime in here.

I'd say that oil will go down when people start to feel like they've got to reduce driving, because 1) they don't have the money to spend on driving, or 2) they are out of work so don't need to drive, or 3) they are scared because the financial headlines are doomish and they fear for their financial future. They will also turn down their thermostats if they lose their jobs or have fear.

Regards gold, it would seem to depend on whether gold is perceived as a good investment or not, and what money is available to shift into gold. To the former, I would say it depends on the financial news media, and my guess is that when the economy begins to fail, there will be an ever-growing call by the pundits to buy gold.

How much money flows into gold . . . I don't know. If lots of people have their savings locked into 401Ks, they might not be able to buy gold. Also, I don't know about institutional investors . . . .

Of course, all this also depends on what oil and gold consumers do in the rest of the world.

[Guest]

Re: when will oil and gold decouple?

Oil and gold seem to me to have low chances of "decoupling". If you dial out any tracking of these to a multi-decade reading, the occasional divergences will be merely that, divergences - or "noise". The five to ten year trends in the next twenty years remaining firmly coupled for oil and gold. Where oil prices continue to rise, gold must follow, or even lead.

JK - your view of a global energy market's reaction to recession is that it "must" fall away and possibly gold keeps rising? This is derived from the conviction that "it can't be different this time" because "it's never different this time" - i.e. that expression has been "proved by time" to be an axiom for false assumptions.

In point of fact, it is indeed absolutely different this time. The reason is clear - the depletion issue arriving is a "one time event". And that is one very large, fat signpost for gold investors to wonder and surmise where the price of gold is tethered in the future decade. Very few takers on this viewpoint among iTulipers now, but over the next few years I believe that many more will come around to it.

The insight is tucked away in the BCA Research post below (soaring oil prices damp global growth, leading to ever loosening central bank money policies to act as a shock absorber - ergo rising gold price).

It's not the G7 or the world's most developed countries that will determine, or even greatly affect oil consumption in the next ten years - the ball is entirely in the court of the developing countries - and very much the oil exporters, who are projected to shrink their oil exports due to soaring internal demand growth. I will dig up my prior post on the "positive elasticity of developing nation energy demand" and repost it below - it explains why this will confound a great many who are calculating classical energy demand destruction patterns based upon developed nation metrics.

I would like to see these people retract their assertions in five years as they see little demand destruction actually occur in the developing world, and potentially see continual soaring demand growth. Regardless of growth behavior, supply will remain anaemic, or worse, contract, and price action will continue reflect that.

__________


At US$100 per barrel of [crude oil], the world's oil bill will approach US$3 trillion, equivalent to roughly 5% of GDP. That would mark a one percentage point increase compared with last year and comes at a time when growth in the advanced economies is already moderating in response to the U.S. housing collapse and tightening credit conditions.

U.S. consumers in particular will feel the pinch, increasing downside risks for the American economy. While strong oil demand – especially in China and the Middle East – is contributing to the surge in crude prices, the rising world oil bill is bearish for global growth. This "tax" on growth adds to pressure for major central banks to ease monetary policy.

– BCA Research

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Energy Crisis - Sean Brodrick


Recently, I wrote I expected oil prices could spike to $150 per barrel in 2008. But, if anything, that target might be too low! In fact, the head of the International Energy Agency just said that demand growth just from China and India alone could cause prices to rise to $150 per barrel.

So imagine what other factors such as geopolitical disruptions would do to prices. Indeed, the fastest-growing bet in the oil market these days is that the price of crude will double to $200 a barrel by the end of this year.





More than 81% of the world's discovered and usable oil reserves come from just 10 countries. 30% of the world's oil is in three countries — Iraq, Kuwait and Saudi Arabia. Saudi Arabia, is the world's "Central Bank of Oil."

The world consumes 173 billion barrels of oil — about 14 Prudhoe Bays — every 2.4 years. At the same time, we find enough new oil to supply just 3% of that.

2008 is when the world will start using oil at a rate of more than 1,000 barrels per second. According to the International Energy Agency, global oil demand will average 87.8 million barrels per day (bpd) in 2008, which equals 1,016 barrels per second — a sonic boom of energy use.

Just to keep prices stable, in the next decade, we're going to have to find a couple more fields the size of Ghawar — the biggest oil field in Saudi Arabia ... and the world.

Since August, the Bush administration has been adding 50,000 barrels a day to the Strategic Petroleum Reserve — the nation's emergency oil stockpile — with plans to kick up the pace to 70,000 barrels a day by the end of January.

Fast-Growing Countries Lining Up for More and More Oil

According to the World Bank, 104 countries expanded by more than 5% in 2006 and most of them kept up that pace in 2007. Businesses and consumers in Asia, South America and Africa are buying more and more cars — 14,000 a day in China alone.

OPEC reports that in 2007, world demand for crude oil rose by 1.2 million barrels per day. They project that in 2008, world oil demand for crude will rise by 1.3 million barrels per day. And by 2030, this thirst is expected to increase about 35%.

Of the world's growing oil consumers, China deserves mention all on its own. China's demand for oil rose from 5.6 million barrels per day in 2003 to 7.6 million in 2007, and will increase another 5.7% this year, the IEA said.

Meanwhile, half of the world's oil production comes from less than 120 giant fields, each producing more than 100,000 barrels per day. The majority of the largest producers are over 50 years old ... the average size of new discoveries is declining ... and we're getting less production out of existing oilfields every year.

Just look at Mexico. The country's state-owned oil company, PEMEX, is the third-largest provider of imported oil to the U.S. And it is facing catastrophic declines. Production in November fell 8.2% from the same period a year earlier. At the root of this is a three-year, 40% decline at Cantarell, Mexico's largest oil field and the third-largest oil field in the world. Even worse, Pemex's daily oil production may drop by a third — to 2.1 million barrels — in just nine years.

OPEC Wants Triple-Digit Oil Prices

The Persian Gulf princes are all in favor of triple-digit oil. Chakib Khelil, the current president of the Organization of Petroleum Exporting Countries, recently told reporters that $100-per-barrrel oil is "not necessarily very high." He added, "There is enough oil in the market."

So when OPEC meets next month to discuss production quotas, don't hold your breath for an increase in production. The fact is that with oil at these price levels, OPEC members are pumping near flat-out to rake in the bucks.

They need that money — the economies of many big oil-exporting countries are growing so fast that their domestic need for energy is drying up their exports.

Lehman Brothers analysts say that this year, OPEC countries will increase their use of oil by 4%. And if that sharp growth continues, it means several of the world's most important suppliers may need to start importing oil within a decade.

According to a report from CIBC World Markets, crude exports could drop by as much as 2.5 million barrels a day by the end of the decade. That is about 3% of global oil demand — and MORE than the current spare capacity in the oil markets.

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[jk]

Re: when will oil and gold decouple?

lukester, please don't turn this thread into another peak oil argument. oil could be past peak and still have its price go down if enough demand disappears.

[Guest]

Re: when will oil and gold decouple?

lukester, please don't turn this thread into another peak oil argument. oil could be past peak and still have its price go down if enough demand disappears.

JK -

Curious response.

I understand - your exasperation is clear - you find this topic over-discussed, presumably at the expense of monetary and credit topics?

However the thread was indeed about gold and oil? My response was about the link between gold and oil - what you are apparently reading by scanning my post is another 're-hash of peak oil'. Your read, and your response, are an expression of your relegation of this theme to a secondary issue. That is your prerogative, but I suggest it's relevance to the 'oil and gold decouple' is a direct response to your question - although it is apparently a response you conclude is irrelevant.

"Oil could be past peak and still have it's price go down". Yes, certainly. That is one viewpoint. I was merely suggesting to you it's a good deal less probable than you believe. Do you not wish me to post a dissenting opinion to your view as to "when will oil and gold decouple"? How about "IF oil and gold decouple"? Are you uninterested to test your thesis against contrasting ones?

[jk]

Re: when will oil and gold decouple?

JK -

Curious response.

I understand - your exasperation is clear - you find this topic over-discussed, presumably at the expense of monetary and credit topics?

However the thread was indeed about gold and oil? My response was about the link between gold and oil - what you are apparently reading by scanning my post is another 're-hash of peak oil'. Your read, and your response, are an expression of your relegation of this theme to a secondary issue. That is your prerogative, but I suggest it's relevance to the 'oil and gold decouple' is a direct response to your question - although it is apparently a response you conclude is irrelevant.

"Oil could be past peak and still have it's price go down". Yes, certainly. That is one viewpoint. I was merely suggesting to you it's a good deal less probable than you believe. Do you not wish me to post a dissenting opinion to your view as to "when will oil and gold decouple"? How about "IF oil and gold decouple"? Are you uninterested to test your thesis against contrasting ones?

all you needed to say was that if oil production was indeed constrained, then oil prices might not drop at all even in the face of a recession, because production might drop faster than demand. thus oil and gold might not decouple at all. or they might decouple by oil rising more or faster than gold. doesn't that sum up the idea?

i've begun to see your posts rather like those of flow5 - long pieces that i don't want to spend time on. i actually lean towards your position - i think we may well be past the peak of oil production, in terms of barrels per day, but i'm not interested in going into detail on the issue. i might be doing you a disservice, and - selfishly speaking - i might be doing myself a worse disservice, but there it is.

[idianov]

Re: when will oil and gold decouple?

I have been wondering about Gold vs Oil decoupling recently. WTIC has outperformed Gold since Jan 2007. The trend could be changing in Gold's favor, but it is too early to tell right now. Keep an eye on the $GOLD:$WTIC ratio. The ration has roughly retraced to 61.8% from the peak in January 2007.

gold vs wtic.jpg

The stock market has clearly entered the bear phase after confirmed trend line failure and breakdown in $SPX:$UST ratio.

spx vs ust.jpg

Regarding Gold sentiment, it is very low despite multi-decade record highs based on alexa.com traffic rating of kitco.com.

kitco090108.PNG

The CEF is now trading at 1.2% premuim in USD and 0.8% premuim in CAD:

cef value.PNG

Is this a bull market or what?

[Guest]

Re: when will oil and gold decouple?

... i've begun to see your posts rather like those of flow5 - long pieces that i don't want to spend time on. ... i'm not interested in going into detail ....

My goodness JK - you must be referring to some other posts. This one was really short. Seems you've chosen to use this one post here on the gold-oil linkage mistakenly, to express pique about longer posts. I mean, how would I shorten it - by one or two (short) paragraphs?

I take it you are 'fatigued' by discussions of emerging persistent tightness in oil markets? I'm definitely in a minority - but I confess I'm a little 'fatigued' by discussions in orbit like moths around a flame, gazing in eternal fascination at imploding mortgages and super-SIV's. I must be the dimwit - everyone else here is absolutely agog on that topic.

[Guest]

Re: when will oil and gold decouple?

Yes, it's definitely a bull market. Now JK will be wanting to get back to discussing Super-SIV's? :rolleyes:

[idianov]

Re: when will oil and gold decouple?

Super SIV is dead. Nothing to discuss...

[Guest]

Re: when will oil and gold decouple?

Ah yes - but we have the unfolding 'terminal American debt and inflationary fiat currency crisis - that one's still got 75% of the tread left on the tire - good for miles and miles and miles and miles.