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« Owning physical Gold | Main | Fronteer’s gold deposit up 28%, stock jumps 11.04%! »
Sunday
Jun082008

Gold, Oil and the US Dollar

Fridays white rabbit out of the hat was played by oil this week as it leapt to an all time high just when the oil bubble appeared to have entered a period of deflation.

The US Dollar dropped 0.91% over the session and the Dow Jones Industrial Average was hit for 394 points as gold put on $23.50. Conventional wisdom tells us that when the price of oil goes up it is inflationary and therefore good for gold prices. On the surface this appears to be holding true but lets look a little deeper.

The first chart compares gold, oil and the dollar since the gold bull market commenced and we can see that gold has reacted inversely to the dollar and more or less tracked the price of oil until recently when the dollar rallied and gold retreated, with oil increasing in dramatic fashion.

Gold Oil and USD since 2001

The second chart has the same comparison over the short-term of the last two months where we can see that oil has increased dramatically over this period but gold has more or less stayed in lock step with the dollar.

Gold Oil USD two months chart 09 June 2008

This behaviour suggests that gold and oil have either disconnected and are going their separate ways or the aberration is only temporary and they will both return to moving in unison shortly. In which case oil has to come down big time or gold has to go up big time.

We are of the opinion that it is not the price of oil that is inflationary but the printing of money, which provides the liquidity for all goods and services to bid ever higher. However, if oil is to remain high and the dollar resumes its path southwards then gold could experience a truly amazing spike. But its not the season for gold spikes is it? People sell in May and that’s it until September time. Well gold was about $850/oz on the 1st May 2008, a level it has not visited since and as we write it is trading in Hong Kong at $900.40/oz.

It appears to us that whether we use charts, fundamental analysis or anecdotal evidence none of them are an exact science carrying certainty of outcome with them. The only certainty that we can see is that we are in a bull market for gold and therefore it is important to maintain a core position at all times. By all means use a small portion of your portfolio for trading purposes from time to time to generate short-term gains but do not lose sight of the main event. Gold and silver will be finish the year a lot higher than they are today and they will eventually exceed all expectations – you have been warned!

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Reader Comments (2)

IMO what you are seeing with the divergence of oil and gold is simply the difference between the ability of the anti-gold cartel (the Fed and other western intl bankers, the Treasury, the PPT, and the bullion bank lackies [esp the co-owners of the Fed, eg, JPMorgan and GoldmanSuchs]) to manipulate the prices of gold and silver and its ability to manipulate the price of oil. Up to this point they still hold rein more or less over the former, though the day of losing those reins is fast approaching, while they can only manipulate the latter indirectly.

But you are right: the spectacle on the days when gold and silver finally break free of their chains and fly will be breathtaking...Cape Canaveral will hold nothing over their blastoffs....

jt

June 9, 2008 | Unregistered Commenterjt

If like me you view gold as an alternative currency, then the high price of oil relative to gold is a reflection of the new value of oil in the post peakoil world.

dt

June 9, 2008 | Unregistered CommenterDavid Turton

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