Cheap Oil And Gold Won’t Last
Over the past month, oil prices have dipped 13%. Gold prices have fallen from $992.10 on June 3, to $938.5 in mid-July.
And last week, gold tested the $900 level, which it hadn’t done since late April.
Interestingly, these commodities have been spiking and pulling back since the beginning of the year, and this increased volatility has investors questioning where both are headed next.
There are two factors that affect these commodities… Editors of the Taipan Publishing Group have been analyzing both over the last week, and the unanimous conclusion they have come to is that cheap oil and gold won’t last.
Let’s talk about where oil and gold are headed, and what you can do to get ready for the next round of gains.
Chinese Buying Spree
Oil prices have dipped recently, but if you think that spells the end of gains for oil shares, consider this...
According to a recent article in the Shanghai Securities News, Chinese companies have been taking advantage of this year’s low oil prices to step up their buying of oil fields around the world.
In the last few days, the China National Petroleum Corp. signed a deal with BP to develop an oil field in Iraq, and made an offer to buy the Argentinean division of the Spanish oil firm, Repsol.
China’s Sinopec Group bought Addax Petroleum. China Aviation Oil signed an intent to purchase a refinery in South Korea. And PetroChina bought 45.5% of Singapore Petroleum.
Why this buying spree? China knows that oil prices will not remain this low for long, and it wants to acquire as much oil as it can while prices are still below three digits.
Crude Realities
The main driver behind tumble in oil prices is demand. And low demand allows supply to climb quickly.
The supply side of the equation needs to catch up with this scenario.
“Petroleum products delivered to the market, an implied gauge of demand, fell to an average of 18.75 million barrels a day in the first half, the Washington, DC-based American Petroleum Institute said,” writes Moming Zhou and Polya Lesova.
Inventories are still 47.6 million barrels above where they were this time last year. Our supply is well above the five-year average. And crude production here has also climbed over the past couple weeks.
Imports are also on the rise.
Would You Like a Mint? It’s Wafer-Thin…
This trend could create a massive supply glut.
The world could get so bloated on excess oil supply that it could destroy oil prices as quickly as the thin mint blew up the fat man in Monty Python’s The Meaning of Life.
Bloomberg’s Grant Smith reports, “Crude oil will collapse to $20 a barrel this year as the recession takes a deeper toll on fuel demand, according to academic and former U.S. government adviser Philip Verleger.”
Verleger estimates that the world will have a surplus of 100 million barrels by the end of the year. He said that supply is outpacing demand by 1 million barrels a day…
For now.
According to Supply Chain Management Review, “the run-up of prices in late 2004 was caused by increasing global demand, especially from growing economies such as in China and India.”
Energy du Jour
The report continues, “Empirical data supports a view that oil is the lubricant needed to enable economic growth. Countries consuming more and building up logistical infrastructure, plants, buildings, and homes need energy to do it – and oil is the energy alternative du jour for the next couple of decades.”
Naturally, “the current financial crisis has negatively affected economies worldwide… [but once these] economies get back on their growth tracks – they can't stay bad forever – there is only one way for oil prices to go”: UP.
The thing is, in order to meet that demand, energy exploration companies “will need to start discovering and tapping into reserves… that are more difficult and expensive to extract.”
The report concludes, “So in the long run, it will be more expensive oil because discovery and extraction costs will rise.”
Making a Fortune
As an investor, you should have a portion of your portfolio in small oil and energy exploration companies. “Early investors in these type of companies stand to make a fortune,” says Chris DeHaemer of Crisis Trader.
Smaller companies tend to be more affected by rises in oil prices than big companies.
And they can be surprisingly resilient in crude price pullbacks.
Chris says, “Oil has fallen back to trend over the last week, but our [Crisis Trader recommendations in] oil and gas stocks have held up extremely well. There is a good possibility oil will bounce higher off its trend line.”
Chris thinks that the drop in inventories, as reported by the Energy Information Administration on Wednesday, might be a bit bullish for oil prices, and thus for certain oil companies.
But let’s not overlook gold.
Analysts Have the Wrong Idea
Forbes.com reports this week that “gold has held above $900 an ounce but lost nearly $20 to reach a two-month low last week. The yellow metal was weighed down by deflation fears and broad-based commodities weakness stemming from U.S. regulatory pressure to limit speculation in energy and metals markets.”
The article continues, “The tendency for the past couple of weeks is that the gold market followed stocks. ‘It is certainly a (gold) rally but the resistance has not been broken,’ said Leonard Kaplan, president of the Illinois-based Prospector Asset Management.”
Furthermore, the article says, “Gold, which fell 2% last week as dollar strength and losses in other commodities pressured prices, was seen as vulnerable to further losses from here, with the $900 an ounce level of support keenly eyed.”
Sure, the metal has fallen from record prices over $1,000 an ounce, but consider the massive moves higher it made to get there. Those factors, which we’ll discuss in a minute, are still there.
That said…
More Weakness Ahead?
Some analysts are forecasting more weakness.
The Wall Street Journal reports that inflation-hedge buying of gold is l osing ground. "People aren’t still jumping headfirst into the bullish theme,” said Michael Gross, broker and futures analyst with OptionSellers.com.
Timothy Silvers, writing for Gold-Eagle.com, reports, “There are some factors that could also contribute to more weakness for the precious metals. Lately, it seems that investors have been overly optimistic that the world economy will recover quickly.”
He says “this led to large increases in stock markets and was a big factor in May that drove up the price of commodities, including oil, gold and silver.” However, “new economic data is leading to the conclusion that the recovery will likely take longer and be weaker than previously expected. Stock markets and commodities are now selling off and gold and silver are trading down along with them.”
Because a recovery in the second half isn’t likely, Justice Litle of Macro Trader is recommending readers not buy gold or gold stocks right now. Justice says, “We’re not in the midst of a standard cyclical recovery as in years past. Instead we are adjusting to a ‘new normal’ as Mohamed El Erian of PIMCO has dubbed it.”
So What Do You Do With Your Money Right Now?
In the longer term, Justice still likes gold stocks. He adds, “Before this recent breakdown, there was an argument that gold stocks could have gone either way. It might have been that gold stocks would break out higher, as scared hedge funds piled into gold stocks as a sort of safe haven in an otherwise crappy environment.”
“But it didn’t happen that way,” Justice explains. “Gold stocks got trashed right alongside oil and energy stocks. And that tells us loud and clear that, at least for now, the whole hard asset complex is being dumped as inflation fears recede, due to a sharp fall in second half recovery expectations.”
However, since Macro Trader’s focus is to uncover long-term trends while protecting one’s wealth, Justice says, “That’s why we are out of gold and gold stocks for now. When the time comes round again to buy hard assets and other inflation-related themes – and it certainly will – we will do so aggressively. But that time isn’t here yet...”
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