Does gold set the price for oil?

The article "Does gold set the price for oil?" by Michael Jaeger in the Washington Times has compared the oil price and the gold price for the last 26 years, from January 2, 1986 to March 3, 2012 (6,457 matching intervals). Using basic statistics, a 2-sample t test was performed and the results are eye-opening. The comparison showed that .0602 ounces of gold times the price of gold produces the price of a barrel of oil, with an standard error of just .421%, between the calculated price and the actual price since 1986. For the last 26 years, the price of gold dictated the price of oil with 99.579 percent accuracy. That seems to be quite convincing. Read the full article for all the details. This TV news broadcast "Fiat Dollar Is The Real Reason For High Gas Prices" also talks about the same article by Michael Jaeger.

Whose gold bar is it?

The referenced article is a must read for all GLD holders and even for physical gold holders. Too many financial institutions perform unethical and illegal operations. MF Global brings to daylight some of the problems arising through rehypothecation in the paper and physical gold market. The article "The Gold "Rehypothecation" Unwind Begins: HSBC Sues MF Global Over Disputed Ownership Of Physical Gold" comes to the conclusion that even allocated physical gold held in customers' names by mayor financial institutions is at risk. Is it time to take the metal home?

‘D-Day’ Near For GLD

If you own GLD or think about investing in GLD it is a smart idea to read these two articles first:

• D-Day near for GLD
• The Seven Sins of GLD

According to the author Jeff Nielson of the article, "D" can stand for "Default"-Day or "Destruction"-Day. He is wrong about the date when D-Day will occur (he suggested 11/11/11), but his warnings are food for thought nevertheless.

Gold has Changed

The article "Gold bugs beware - The Gold bubble is finally bursting" in the Financial Times argues that the gold bubble is about to burst. I would agree that gold is in a bubble phase, but I see it as a lesser evil than other forms of investment and wealth protection. What the article does bring to ones attention is that gold today is not what gold was a decade ago. Gold has changed a lot due to the creation of popular ETFs such as GLD. Now gold has become an electronic digit on the computer, it can be bought, sold, repackaged, options taken with the click of the mouse or the stroke of a key. It has turned gold into a speculation. Even those of us who dislike the idea of speculation have to live with this new fact. The burdensome and limiting process of a physical object has become a 0 or 1 sent through the Internet at the speed of electrons. Now its here, now its not. It is bought and sold like any other share thousands of times a day when its value moves a cent up or a cent down. With this in mind we can forget anything we know about gold and forget all the lessons learned from gold in the past. Gold isn't gold anymore. Gold is riskier than ever before and it might bring to light many unexpected surprises. Still what is one going to chose for one's personal pension or long-term nest-egg: dollars, Euros, government bonds, oil, real estate, silver or gold? One option looks worse than the other. The least frightening option might still be precious metals.

Gold Mining nationalized in Venezuela

Hugo Chavez nationalized the mining of gold in Venezuela. Private mining becomes illegal. Why? Apparently many poor mine in the rainforest causing income/tax loss to the government while destroying the environment. Read here. At the same time he announced that Venezuela will bring home $11 billion in gold bullion currently held in vaults in various oversea banks such as JP Morgan. Now that is an interesting move. Is the gold market becoming illiquid? Will this cause a run on physical gold? It is easier to control at home in the National Bank of Venezuela than abroad. It could be a safeguard to avoid having it confiscated by other nations or being blackmailed through political sanctions. Either way it seems a smart move. Or it could be a requirement by China, Russia or Brazil to have the gold bullion at home as a security or guarantee for the loans of $30+ billions received from these 3 countries over the last couple of years. Here are some more thoughts on the Why.

Gold vs. Oil

Both resources oil and gold are interesting from an investment perspective. Both are natural resources and interesting options in times of change. Oil took quite a nose dive over the last weeks and gold is up by 30% YTD. Why is that? The answer nobody can know for sure but there are certainly many factors ranging from economic growth, economic forecasts, resource discoveries, exploration costs, speculation, global stability, wars to political signals. Here is an interesting up-to-date chart comparing oil to gold. On the chart one can quickly see that the oil to gold ratio has doubled ion just one year (2008 to 2009) and is overall quite volatile.

Gold as Safe Haven?

While the article "'Safe Haven' Assets Start to Look Risky" does not have a lot of facts and hard data it gives some common sense perspectives on safe haven investments in current times. It does a light comparison of gold, Swiss Francs and government treasury notes.

Gold Purchases

Who is buying gold? The latest data of state gold purchases and sales have been published by the World Gold Council. This data shows the following countries as leading gold purchasers over the last 10 years:

• China: some 550 tonnes
• Russia: some 420 tonnes
• India: some 200 tonnes
• Mexico: some 100 tonnes

It is interesting to see that there is no European country, not a single one, that has purchased any significant (5 tonnes or more) amount of gold at any point in time. The US hasn't bought any gold either. India and Mexico have been single one-time purchases. China and Russia are continuously buying mid-sized amounts year by year. Europe as a whole has sold around 3,000 tonnes of gold over the last decade.

Saudi Arabia is listed with a one-time 180 tonnes entry, but as far as I can tell this is not a real purchase but a paper adjustment.

It is a telling sign that the US and EU are not purchasing any gold with respect to any future currency decisions the politicians/banks of these countries will make.

Gold

Just like silver, gold is also up and climbing. And there are lots of news around gold.

First, there is World Bank chief Bob Zoellick who said "Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today." He made further comments that hinted at a gold standard. Amazing, the chief of the World Bank hinting about a gold standard. That is massive news. It was reported instantly. The next day came all the expected retractions and he said he was misinterpreted and that in fact he did not call for a gold standard.

One may think about this as a slip of the tongue or true misinterpretation. Independent of that, he was certainly right when he said "Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today." Why? Gold has been made an official currency for collaterals of large financial transactions. A press announcement from ICE states: "IntercontinentalExchange (ICE), a leading operator of global regulated futures exchanges, clearing houses and over-the-counter (OTC) markets, today announced that ICE Clear Europe will accept gold bullion as collateral for all energy and credit default swaps (CDS) transactions beginning 22 November 2010." With ICE putting this policy in place other operators and clearing houses will have a competitive incentive to follow.

Gold is gaining in importance in the financial world it seems.

Silver

Silver is acting unusually in the markets. In 2010, silver has doubled. The 2010 low-price was $14.82. The 2010 high mark so far was $28.638. What could justify such insane increase in the silver price. Speculation is the only possible answer. When can we get to a real economy based on real productivity, producing real and useful goods? We must move away from a speculative, financial economy where gains and losses are all in numbers if we want to avoid bursting bubbles and a unfair and unjust society.

A friend sent me these links: JP Morgan and HSBC are manipulating the silver market since 2008. This is not the first time in history that banks or rich individuals are manipulating the silver market. The interesting part about this current manipulation is that it was picked up by the independent news and activist groups. People like Max Keiser and Alex Jones rallied and promoted people to buy silver in order to financially hurt JP Morgan and cohorts. It is a risky business to put yourself as a single small investor against the bullies like JP Morgan. Nonetheless, it is fascinating strategy - although uncertain in success - to band together many small investors to bring down a giant bank by betting against it on a market gamble, in this case the silver market. According to Max Keiser as long as the silver price remains higher than $25/oz. JP Morgan is punished. As a last note: let's not forget that this war cry to buy silver to crash JP Morgan is also a form of silver market manipulation. But at least this is a public one talked about on the internet, while JP Morgan's shorting is a stealth maneuver hidden from the public.

PS: About 2 weeks later this was posted: Is J.P. Morgan Getting Squeezed in Silver Market? According to this JP Morgan is now manipulating the copper market to offset losses in the silver market.