Blog Archives

What Is the Gold-Oil Ratio Telling Us?

Based on historical gold-oil ratios, oil appears extraordinarily cheap right now.

One way to establish if a commodity or asset is relatively expensive or inexpensive is to price it in something other than a fiat currency–for example, gold. Gold goes up and down in value relative to other commodities and fiat currencies, so it is itself a volatile yardstick. Nonetheless, it provides a useful measure of the relative value of gold and whatever is being measured in gold–in this case, oil.

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The Oil-Drenched Black Swan, Part 3: Multiple Risks, Multiple Unknowns

It is these unforeseeable and uncontrollable consequences that are poised to wreak havoc on the global financial system.

Here’s the thing about risk: it bursts out of whatever is deemed “safe.” It wasn’t accidental that the Global Financial Meltdown originated in home mortgages; it was the perceived safety of the mortgage market that attracted all the speculative debt and leverage.

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The Oil-Drenched Black Swan, Part 2: The Financialization of Oil

All the analysts chortling over the “equivalent of a tax break” for consumers are about to be buried by an avalanche of defaults and crushing losses as the chickens of financializing oil come home to roost.

The pundits crowing about the stimulus effect of lower oil prices on consumers are missing the real story, which is the financialization of oil. Financialization is another word that is often bandied about without the benefit of a definition.

Here is my definition:

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The Oil-Drenched Black Swan, Part 1

Given the presumed 17% expansion of the global economy since 2009, the tiny increases in production could not possibly flood the world in oil unless demand has cratered.

The term Black Swan shows up in all sorts of discussions, but what does it actually mean? Though the term has roots stretching back to the 16th century, today it refers to author Nassim Taleb’s meaning as defined in his books, Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets and The Black Swan: The Impact of the Highly Improbable:

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Massacre in metals and oil

Stacy Summary: Precious metals and oil continue to behave as if it’s 2008; whilst equity markets and property markets continue to soar. Either pm’s and oil are signalling a massive deflation on the horizon; or central bankers have won – they, indeed, can command markets as Poseidon could command the seas. In which case, one should not fight Poseidon and one should do as he commands. Hopefully, he will take care of us all should we please him.

The dollar soars - as in deflationary times? Or as Poseidon commands?

The dollar soars – as in deflationary times? Or as Poseidon commands?

Oil continues to tumble. Bad news for shale oil producers in America? Or will Poseidon take care of them?

Oil continues to tumble. Bad news for shale oil producers in America? Or will Poseidon take care of them?

By the way, many say that tumbling oil prices is the result of some sort of economic war against Russia. And maybe those analysts are right, but, as I see it, the ruble is also down against the dollar in which oil is priced, thus remaining neutral for their budget (which is all cold war financial press focuses on rather than their cost of production which is much lower than US and/or Canada):

Ruble falling along with oil price, thus keeping state revenues flat?

Ruble falling along with oil price, thus keeping state revenues flat?

Here is a piece on how this collapse in price of oil could lead to a price spike due to expensive projects in the US.

And here are the not so precious metals, now, as with oil, trading below cost of production at many mines I should think:

Still up over four-fold since 2000; but painful for those who bought high.

Still up over four-fold since 2000; but painful for those who bought high.

Again, painful for those who bought high but record demand for coins suggests many are happy with new price.

Again, painful for those who bought high but record demand for coins suggests many are happy with new price.

While some are unhappy with low prices, just as many are happy with lower prices:

Gold prices swoon, coin sales surge as buyers seek bargains

A sharp break in gold prices to their lowest levels in more than four years has unleashed a surge in demand for coins, with buyers in Germany queueing out the door and some U.S. investors returning to the market for the first time in years.

Coin dealers and mints from North America to Europe are reporting a surge in coins and small bars that are favored by retail investors, after spot gold on Friday broke below a key technical support at $1,180 an ounce. It was the biggest buying binge since April 2013, when prices fell by $200 in two days.

Activity at Germany’s Degussa, one of the largest European gold and silver dealers, was three times the norm, said CEO Wolfgang Wrzesniok-Rossbach.

“We had to open for half an hour longer across Germany on Friday evening because there were so many people queuing up in the branches,” he said.

On Friday alone, the U.S. Mint sold 1,425,000 ounces in American Silver Eagle bullion coins, the highest one-day tally since Jan. 13 when the new 2014-dated coins first became available. It also accounted for one-quarter of sales for the entire month of October. Sales on Monday were also above average.

Someone is selling them their metals; and we’ve seen this record demand all the way down. The world’s most successful investor, Warren Buffett, always says he buys when things are cheap and everyone hates it. In the end, however, either the mere people and their physical defeats the fiat gods in the central banks or Poseidon wins and convinces them to believe.

UPDATE:

According to Zerohedge, there appears to be a Gordon Brown like entity in the markets perhaps unintentionally getting the worst price possible. Or could be intentional – like suicide by cop, but suicide by market.

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What’s Behind the Rise in U.S. Industrial Production?

The domestic energy boom is behind the expansion of Industrial Production.

In contrast to other measures of economic activity that are stagnant or declining, U.S. industrial production has been rising: Industrial Production and Capacity Utilization (Federal Reserve data)

Is this evidence that manufacturing is on-shoring, i.e. returning from overseas? While there is anecdotal evidence for on-shoring, it appears that energy production (classified as part of mining in government statistics) is the big driver of rising industrial production.

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Asia’s Singapore Aims To Become A Major Global Gold Trading Hub – Launching New Gold Trading Contracts

Oil and gold have been in a long term relationship with each other, and as like most relationships it has been both blissful and at times a stormy affair. The attached chart shows the price performance of both, gold moving up 327% in the last 10 years and oil rising 363%.

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Still Think the Fed Isn’t Fueling Inflation? Check Out This Chart

Just as we can’t eat iPods, we can’t subsist on official reassurances that the Fed and inflation are both benign.

There is a great divergence between the conventional financial media and the public who goes to the supermarket: the financial media swallows whole the official artifice that inflation is near-zero while J.Q. Public sees his/her grocery costs, health insurance, etc. rising by leaps and bounds.

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Joe Biden’s Son Joins Board of Ukraine’s Largest Gas Producer

Stacy Summary: Of course, to speak of this would invite oneself to be called, ‘Putin’s puppet’ for only American puppetry is allowed when discussing geopolitics; nevertheless; it’s, as Zerohedge points out, an utter farce. Between Victoria Nuland’s husband having lobbying relations with Cargill and other BigAg corporations buying into Ukraine; to now Joe Biden’s son and Ukraine oil. Fine, America wants oligarchs, go for it. But just stop mocking and condemning other nations for doing same . . . including the propaganda around overthrow of elected government of Ukraine on basis that it was oligarchical. One major problem for Biden’s bid for Ukraine gas is that the company “holds a portfolio with permits to develop fields in the Dnieper-Donets, the Carpathian and the Azov-Kuban basins.”

Do note that the Dnieper-Donets field holds 90% of Ukraine’s oil and gas reserves. And then do look at the map below for the slight problem they now have:

Uh, Houston, we have a problem.

Uh, Houston, we have a problem.

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‘Russia serious about pricing oil in roubles’ – Russian Ambassador to Rickards

Interesting tweet from Jim Rickards.


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