Commodities | - Part 5

Awash in (Expensive) Oil

WTI crude oil is rebounding this morning and the price for one barrel of the stuff now sits at a little over $66 dollars, a number that somehow seems equally odd and menacing.

The financial media is replete with stories of impending doom with the consensus being that marginal supplier Saudi Arabia has taken aim at johnny-come-lately marginal supplier U.S. shale, shown in green below via this offering from Prof. James Hamilton at Econbrowser.

Between Canada’s oil sands production and the boom in U.S. shale oil, North America has foisted upon the world a lot of dear oil and, now, OPEC appears to have seen enough of it.

Obviously, the solution here is for Wall Street and the Fed to provide even more cheap money in order to facilitate even bigger negative cash flows in the shale oil patch that will go on in perpetuity – let’s see how the Saudis like that.

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As noted earlier today, in Consumer Prices Jump 0.3% in April, two key takeaways from the latest inflation data are that annual price gains have again reached the two percent level and recent increases have been very broad-based.

When combined with what is now generally seen as an improving U.S. economy and the well known axiom that “when higher inflation arrives, it usually arrives very quickly,” today’s inflation report could signal the beginning of a sustained move higher for gold and silver prices.

Admittedly, inflation hasn’t been much of a factor for precious metals lately, but that could soon change, particularly if the recent upward trend in the year-over-year inflation rates continues.

Recall that the gold price reached its apex at above $1,920 an ounce back in the fall of 2011 that coincided with the recent peak in inflation at about 4 percent. There were a number of other important factors at the time, but elevated inflation was clearly one of them.

This point should be clear when reviewing the chart below that includes the SPDR Gold Shares ETF (GLD) alongside the Labor Department’s measure of consumer prices.

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The latest Gallup survey on investment preferences in the U.S. puts real estate ahead of gold and stocks for the first time in at least a few years in yet another example of how most people (at least in the U.S.) simply follow established trends.

Interestingly, those favoring real estate as the best long-term investment rose to as high as 50 percent a decade ago when the prior housing bubble was inflating.

There’s also a breakdown of preferences by income, age, and political party affiliation. Not surprisingly, those with higher incomes favor stocks and real estate over other investment choices and the appeal of gold goes up as income goes down.

By a wide margin, younger Americans think more highly of Savings accounts/CDs than do other age groups, but the most interesting part of this survey (at least to me) was how views toward equity markets change  based on party affiliation. Some 30 percent of Democrats think stocks are the best investment, but only 26 percent of Republicans agree, yet just 19 percent of independents also see it this way.

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More evidence that the mainstream financial media often gets it wrong when reporting on precious metals in general and gold in particular when it comes to reporting on anything other than its price comes via this story at Reuters on Tuesday.

It seized on a few comments at the tail end of a World Gold Council report to craft the sensationally bearish China may have 1,000 tonnes of gold tied in financing – WGC which was not only misleading, but violated some very important rules about context.

Author A. Ananthalakshmi, who according to her page at Reuters has recently dealt exclusively with the mundane, day-to-day reporting on the gold market until this offering, exorcises all of the grey area out of the following paragraph found on page 56 of the World Gold Council’s 57 page report:

The use of gold for purely financial operations is a form of demand that represents a small part of the much wider growth in shadow banking, which while entirely legal, is considered a grey area. Not surprisingly, there is little hard data on the shadow banking sector but J.P. Morgan recently estimated it at RMB46tn (US$1.7tn), equal to about 84% of China’s GDP. No statistics are available on the outstanding amount of gold tied up in financial operations linked to shadow banking but Precious Metals Insights believes it is feasible that by the end of 2013 this could have reached a cumulative 1,000t, equal to a nominal value of nearly $40bn.

It is then offered up as simply this at Reuters:

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This World Gold Council report about demand for the precious metal in China was blamed for much of today’s sell-off, a move lower that brought back memories of  what happened exactly one year ago, on April 15th, 2013, when the gold price plunged more than $150 an ounce, this following a free-fall of almost $100 the Friday before.

Of course, the Reuters report China may have 1,000 tonnes of gold tied in financing – WGC and the Wall Street Journal’s China Is Losing Its Taste for Gold didn’t help matters.

Also, like a year ago, it didn’t help that Goldman Sachs analysts were out with what seems to be a weekly reiteration of their very bearish forecast for metal prices.

Recall that, a year ago, Goldman loudly expressed their negative view on where prices were headed – taking the unusual step of recommending that clients short the metal – and it didn’t take long for twitchy futures traders to act upon that advice.

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