Oil is a commodity, gold is money - decoupling will happen
With the global oil price suffering a significant correction in the
past few days, gold too is showing signs of weakness, but the oil price and
gold price should decouple as the one is a commodity and the other ‘money'.
Author: Lawrence Williams
19 July 2008
With the oil price falling more than 10 percent over the past few days - a
level sufficient to be termed a ‘correction' - the gold price has also
suffered, but not nearly to the same extent percentage wise, at least so
far. This could be taken as an indication of a beginning of the mooted
decoupling of gold from the oil price which would have to happen if gold is
to be the answer as a true hedge against inflation and economic carnage.
In reality though, oil is a commodity and just like any other commodity is
primarily subject to supply and demand considerations, while gold is,
despite the views of some figures in the Central Banking community, a
currency. Gold is still ‘money' as far as much of the world is concerned and
thus behaves differently from most other metals.
Oil price fundamentals are not supportive of a continuing price surge. A
very significant fall in U.S. gasoline consumption over the past few months
as drivers have been beginning to experience European style petroleum
prices, coupled with increased oil output from a nervous Saudi Arabia - and
a market which was probably not in deficit anyway - has outweighed
developing nation growth. After all the U.S. is the world's most profligate
oil consumer and a 5 percent fall in gasoline usage there represents more
than a 1 percent fall in world consumption. And the U.S. decline in
consumption will continue. Gasoline was cheap. It is not now. And if
anything will drive the U.S. public towards more economic vehicle usage, and
lower consumption, $4 a gallon gasoline most certainly will.
European usage is also declining as the combination of higher oil prices and
soaring inflation is putting a dent in automobile journeys here too - a
pattern being seen across the world.
All this suggests that the overblown oil price is due for a slump - perhaps
back to the $100 level or lower, which would bring a collective sigh of
relief to those responsible for the economies of most nations around the
world. Gold, on the other hand, although it has been seen to be tracking oil
of late, should be in an entirely different category as far as investors are
concerned. Economic turmoil, not just inflation - although the two may be
going hand in hand at the moment - tends to help boost the gold price, with
gold as a portfolio diversifier, and there is little indication that the
current economic malaise is anywhere near over yet.
While the turmoil continues, the US dollar, currency of the country which
started it all, will likely remain weak, although as we pointed out
yesterday other countries' currencies will also weaken as economic
instability hits them too which may seemingly help the dollar reverse its
decline against a currency basket. But with gold perhaps the ultimate
indicator of dollar weakness or strength, its price should strengthen, even
as the oil price drops.
Those who mistakenly perhaps see the oil and gold prices linked as
indicators of dollar weakness, may mark the gold price down as oil falls
back, but this should be shortlived. Oil should be subject virtually in its
entirety to the laws of supply and demand. Gold remains, in our view, in a
different category altogether, although not totally immune to supply/demand
balance factors.
Historically though, the gold price per ounce: oil price pr barrel ratio has
been around 10:1. This suggests oil has a way to fall, or gold needs to rise
- or perhaps a combination of the two may be the most likely short to medium
term scenario.
From www.mineweb.com