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Seasonally,
oil (USO) is
extremely weak from October through December. In 2008 oil started October at
about $100 and ended December around $40 or around a monstrous 60% decline.
Oil is strongest seasonally from July through September with the strongest
individual months being January and August. Oil’s 200dma sits right
around $100, appears to have hit around its bottom and the 200dma is exerting
a gravitational like effect pulling oil prices up.
By
contrast gold’s 200dma is at about $860 per ounce. Gold (GLD) has
recently passed through its strongest seasonal period from September to
December. It maintains the uptrend from January to March, is asleep the rest
of the year except for a strong rally in May. While seasonality is helpful,
it does not etch the future in bullion and this year has been different.
The
recent financial turmoil has caused tremendous technical damage to gold
almost as if it was done intentionally to stunt its bull market during all of
the financial carnage. GATA asserts that
when the news is really bad gold goes down. Well, the last half of 2008, when
gold should have performed well seasonally, it swooned from over $1,000 per
ounce to the $680’s while Lehman Brothers (LEHMQ.PK) evaporated, Fannie (FNM) and
Freddie (FRE) were
nationalized and bailouts were served every night on the news. Such
suppression has only wound the spring that much tighter.
 It is
important to keep in mind that both of these commodities are still in strong
secular bull markets. The FRN$ is in a strong secular bear market as is the
DOW and real estate. The Gold/Oil ratio is now about 23 barrels of oil per
ounce of gold. The 200dma is about 9.5 and the historic average is around 15.
The
extremes happened in 1974, 1986 and 1988 as the ratio approached 30 and 1977,
2001, 2008 at about 8 and 2006 at around 6. For these relative prices to
return to more normal ratios something is going to give. Oil is either going
to go up, gold is going to go down or to move into some sneaky calculus the rate of
oil’s rise will be faster than gold’s. The silver (SLV) to
oil ratio is not nearly as extreme as gold to oil but silver will most likely
follow gold, either up or down, at a faster rate of change.
This
is where geo-politics arrives. Are the oil
producers willing to take so little value in exchange for their precious
black gold? With Peak Oil (mp3) asserting itself
the oil producers should hold the bargaining power. The latest IEA numbers
indicate an extremely
serious steeper than expected 9.1% decline rate. Yes,
the Canadian Oil Trusts will
rise in value as a safe, secure and stable source of oil. But perhaps the oil
exporters should sit on their oil and let the importers roil and writhe in
pain as E. M. Forster’s 1909 essay The Machine Stops is
played out. After all, a barrel in the future will be worth more than a
barrel today. Obviously, the collapse will not be televised.
At all
times and in all circumstances gold remains money. It is the most powerful
currency in the world. Oil is the world’s primary energy
source which is why the gold to oil ratio is important. Gold is the most effective tool
humans have to perform mental calculations of value. By
analogy it is the tool used to determine how many calories an apple provides
and how many calories it takes to collect and process the apple so it can be
eaten.
Producing
gold is essentially converting energy into bullion. How many calories go into
producing a one ounce gold coin? In some cases to produce a single ounce
hundreds of tons of rock are moved. Ultimately,
money is about energy. To make it personal, how much value
should you put on that nice steak dinner, bottle of water from Fiji or 3,000
mile Ceaser salad? Well, think through the supply chain and how much energy
the good or service represents.
The
world has a very serious problem. Because it has
used a fiat currency with no definition or basis in reality for nearly 100
years and because oil production was constantly increasing during that time
the effects of unwise capital investment were masked. Energy Return On Energy Invested (EROEI)
calculations were not even performed. A fiat currency
attempts to sustain the unsustainable while a commodity-based currency
employs the strict laws of reality to ensure the unsustainable is not
encouraged.
In
other words, no one knew or calculated either how many calories the apple
supplied or how many calories it took to procure and process the apple. The
entire infrastructure of the entire world was built using mental calculations
of value based on a derivative illusion. As
natural and economic law assert reality and gold begins circulating as currency in
ordinary daily transactions the distortions will be removed and the gross
misallocations of capital will be revealed. I wonder what such a world will look like?
Will The Machine Stop?
Disclosures: Long
physical gold and no position in GLD, SLV or USO.
Trace Mayer
RuntoGold.com
Trace Mayer,
J.D., holds a degree in Accounting from Brigham Young University, a law
degree from California Western School of Law and studies the Austrian school
of economics. He works as an entrepreneur, investor, journalist and monetary
scientist. He is a strong advocate of the freedom of speech, a member of the
Society of Professional Journalists and the San Diego County Bar Association.
He has appeared on ABC, NBC, BNN, many radio shows and presented at many
investment conferences throughout the world.
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