Gold Sold to Buy Oil

Gold prices lose more ground, oil rebounds

Show of hands. Who didn't see this coming? The entire reason for gold being a safe haven is that you can sell it later to come up with the cash to buy other things you can actually use. Oil just happens to be one of those other things. Right?

Gold has done very well over the last decade. So here's my theory. Now that more useful commodities (oil, food) are seemingly trying to put in a bottom, gold can now be "safely" sold to buy these things. That does not exactly inspire me to want to buy gold right now. I'd much rather be buying those other things before others do.

Here are a few other things that bother me about gold.

1. The experts speak of a gold to oil ratio. I see a major problem with that though. Oil is consumed. There is a danger we might someday run out. The United States certainly is. In sharp contrast, the bulk of all the gold that has ever been mined is still in existence. Therefore, why would a ratio between the two even make sense? Yeah, I know it looks like it makes sense when we look at charts of it. Charts can make a lot of things appear to make sense though. The chart of long-term real estate prices made a lot of sense until real estate prices collapsed. The same could be said of long-term stock price charts. In my world, I'd much prefer to come up with a theory first and then see a chart that backs the theory. Maybe that's just me.

2. I've been told (repeatedly) that the beauty of gold as a safe haven is that it isn't actually used much in industry. Therefore, when industry falls apart it won't drag down the price of gold. Tulip bulbs weren't used much in industry either and we know how that worked out. This is even coming from someone who is sympathetic to the idea that gold is a safe haven!

3. Mad Max was not looking for gold and silver. He wanted oil and food. I'm fairly sure that if someone would have offered him several hundred pounds of gold coins for his tank of gasoline he would have laughed. Being able to drive his car was clearly very important to him. In fact, it was so important to him that he was willing to use a rag to soak up the last of any spilled gasoline.

4. Some gold bugs seem to think we can have a serious inflation problem without rising oil prices and gold would be a great safe haven in that environment. I think that's a pipe dream. If someone could prove to me that oil will be the same price (in US dollars) in 50 years, I would not be even the slightest bit worried about inflation. The lack of cheap energy is the root of future inflation problems to me. If energy stays cheap, then the world's excess supply of workers can and will keep all prices low. That's my thinking anyway.

I can't believe I'm actually heckling. I do have stagflationary in my name. You'd think I'd love gold at any price. Some do. However, I'm not quite of that mindset though. There is nothing I love at any price. Further, if given the choice between hoarding gold at near all time highs and hoarding oil now that is roughly 75% off of its peak, I'd be much more tempted to do the latter. Please do not assume that I am anti-gold though. I'm not. I just see a few major risks, that's all.

It really feels like a casino these days. I'm content on the sidelines. I just have no interest in being long or short stocks, gold, or oil. Anything can happen.

I can say that I am very concerned that physical oil vastly outperformed the stock market's impressive rally today. The extrapolator in me is reminded of the period following the 1974 bear market.

I'm told that China's stimulus is partly responsible for the more upbeat outlook today. Based on the overwhelming success (sarcasm) of our stimulus packages so far, I wouldn't exactly go holding my breath that China's economy will bounce back robustly. That could mean investors might soon be selling oil to buy gold again.

November 10, 2008
Stocks surge after China stimulus

Asian markets have risen sharply, a day after China announced a huge investment plan to kick-start its slowing economy.

Oops! That's nearly ancient history. I meant to find something about China's new and improved stimulus package. Sorry about that. Let me try again.

March 5, 2009
Asian Stocks Rise, Led by BHP, Komatsu, on China Stimulus Plan

March 5 (Bloomberg) -- Asian stocks gained for a second day, led by commodity and financial companies, on speculation an expanded economic stimulus plan in China will spur demand for raw materials and machinery.

I think you can see why I was so confused. All these stimulus package rallies are starting to look the same to me.

And lastly, I have one more comment about that last link. I am not a believer in the theory that commodity based rallies will lead us back to prosperity. Not by a long shot. I'm thinking stagflation if it continues, followed by yet another deflationary event. Just a hunch.