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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 $680’s while
Lehman Brothers evaporated, Fannie and Freddie were nationalized and bailouts
were served every night on the news. Such suppression has only wound
the spring that much tighter.
 It is important to keep in mind that both of these
commodities are still in strong secular bull markets. The FRN$ 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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