when will oil and gold decouple?

[Finster]

Re: when will oil and gold decouple?

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?

In a fundamental way, this chart (reproduced again below) says that gold and oil have never actually been coupled in the first place. The strong correlation in dollar prices, especially over the longer term, is more an artifact of variation (mostly shrinkage) in a common unit used to express the prices of both.

But that doesn't mean there are no real displacements in oil prices relative to gold. Even in gold terms, the price of oil has covered about a 3:1 range during the time frame that chart covers. Most investors would consider that pretty significant! That range only become insignificant when compared to the territory covered in nominal USD prices ... more like 30:1.

If you step back and look at the overall pattern, there does seem to be a long cycle running through it. Relatively high oil prices from about 1973 to about 1985, followed by relatively low oil prices 1986 to 1999, then back up again. Again, since we are looking at prices in gold terms, we can't dismiss these variations as dollar phenomena. Some thing real is going here, either with real supply and demand issues for gold, oil, or both. Some of the features we can associate with real economic events, such as the spike in 1990 associated with the Gulf War and the spike in 2005 associate with Katrina. There is also the inverted spike in early 1980 due to the manic blowoff in gold.

[Jim Nickerson]

Re: when will oil and gold decouple?

Realizing this thread is about oil, gold and decoupling, is it all right to ask you, Finster, what are your thoughts at the moment about gold stocks and general equities not decoupling so far?

General equities last I looked have been going down and mining stocks up.

[Finster]

Re: when will oil and gold decouple?

Realizing this thread is about oil, gold and decoupling, is it all right to ask you, Finster, what are your thoughts at the moment about gold stocks and general equities not decoupling so far?

General equities last I looked have been going down and mining stocks up.

The general idea is that the prices of stocks of commodity producers correlate to both the general stock market and the price of the commodity. General equities have indeed been going down, but gold and silver have been s-o-a-r-i-n-g.

[idianov]

Re: when will oil and gold decouple?

Jim,

I would like to offer my speculation regarding miners. As oil gets weaker in a slowdown, miners costs (minining, transportation, etc.) will go down too. This should be bullish for profits, unless of course, gold drops significantly from these levels. I would pick the strongest in the unhedged producers group.

And regarding "evil twins", gold vs oil, it appears the change of leadship took place:

gold vs wtic update.jpg

Igor

[Finster]

Re: when will oil and gold decouple?

Jim,

I would like to offer my speculation regarding miners. As oil gets weaker in a slowdown, miners costs (minining, transportation, etc.) will go down too. This should be bullish for profits, unless of course, gold drops significantly from these levels. I would pick the strongest in the unhedged producers group.

And regarding "evil twins", gold vs oil, it appears the change of leadship took place:

...

Igor

Here's another one of my favorites, appearing to support a similar conclusion:

[GRG55]

Re: when will oil and gold decouple?

Jim,

I would like to offer my speculation regarding miners. As oil gets weaker in a slowdown, miners costs (minining, transportation, etc.) will go down too. This should be bullish for profits, unless of course, gold drops significantly from these levels. I would pick the strongest in the unhedged producers group.

And regarding "evil twins", gold vs oil, it appears the change of leadship took place:

[ATTACH]197[/ATTACH]

Igor

The "change of leadership" from oil to gold is due to the credit problems finally coming to the forefront and, at long last, being priced into the markets (evidenced by the financial stocks and gold).

I don't see much evidence, so far, that oil is getting "weaker in a slowdown". Still could happen, no doubt (as I've repeated often, predicting oil prices in the short run is a mugs game). But for now markets are being allowed the luxury of time for a relatively orderly re-pricing of the effect of the credit issues. Most of the adjustment has probably already happened.

The same factors that drive gold prices tend to drive oil prices over the medium and longer term. I went very long oil in the 1st Q 1999, rode out the recession early this decade, continue to hold those positions, and so far it's been just as good an investment as gold this decade.

[idianov]

Re: when will oil and gold decouple?

GR,

Gold and Oil have been good investments indeed. The change in the trend of $GOLD:$WTIC ratio may suggest that at this point Gold may hold value better than Oil.

Igor