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Gold / Oil - Where to?

The following is an excerpt from our 27 June Weekly Outlook #26

Before we worry about what the Fed will do with interest rates this week, let's take a look at the BIG picture regarding gold, oil and the Euro and get some perspective. Note this is a weekly chart below (less clutter) going back to 1990. After the recent sell-off in gold many are talking of "it's over", etc with respect to higher gold prices. We are cautious to that way of thinking because history looks different and currently does not bear out that projection. On leaving office in 2000 Clinton left with the US economy doing well and the USD (purple) at its zenith while gold was hovering around the $250 mark. Since that time the Euro (green) and gold have been moving in near perfect tandem for the last six (6) years and since January of this year in exact tandem. In fact, since 1990 gold and the Euro (German Mark proxy) have moved together. The chart further below shows a 15 yr. long-term inverted head / shoulder formation at 1.35 Euro level. We now feel that consolidation on the Euro / USD will take place as gold moves sideways to lower over the next 6 months.

We have already stated this outlook in the Latest Letter "World Glut 2006" - see that for more information. Likewise, as shown in the chart below, the oil and gold prices have as well been moving in tandem since 1990. This is a possible warning sign that something is not "right" going forward. IF history can be a source of predicting the gold future then ideally gold would rise once again as the US Dollar starts to break down and the Euro rate rises AND equally, oil and gold should move in tandem upward. Yet, who is leading whom?

According to Nouriel Roubini's bearish bullet point scenario below, oil may be headed down another 25 to 30 dollars. At the moment, this seems hard to believe yet we let it stand and are open to the idea. Would this take gold with it? Here we have a number of ideas -

Courtesy: SG

  • both gold and oil were bottoming in '98/'99 as the swap spreads were starting to rise
  • CB rates were accomodative then but not now and therefore may be a "positive false"
  • Gold works anti-cyclical ; in "fear" environments it does well
  • The swap spread follows the USD overall
  • We do not see a higher continuance in the swap spread right now
  • The "premium" on oil prices due to geopolitical risk is around $10 to $15 / bbl currently

In conclusion, we foresee a stabilizing oil price in the $55-65 price range mid term, not considering geopolitical risks, and see a re-assertion of the gold / crude ratio moving higher over the next 12 to 18 months as crude has simply moved too fast too quickly. From 1999 to 2006 crude moved near 700% in price while gold moved in the same timeframe approx. 150% hence we see that ratio at a low right now. We foresee this moving higher either through higher gold prices or lower crude or a combination of both. If there are any major geopolitical "events" in the unstable oil regions then we stand by our $100 crude outlook depending on length and location of the incident.


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