Gold, Oil and Politics
October 4, 2006
To expound a little further on the gold/oil/politics relationships I touched
on yesterday, here are some further thoughts on how each affect the other.
Certainly,
gold and oil are the most political of any commodity/asset class out in the
financial markets. Unlike, copper, wheat, natural gas, zinc or any host of
other commodities, gold and oil can be pushed around on a short term basis by
political speeches and activities.
For example, the two best scenarios to point out are meetings by OPEC and
the speech by Gordon Brown, Chancellor of the Exchequer in the UK in 1999. When
OPEC meets, each and every comment made by any representative is dissected
and interpreted by markets around the globe as being positive or negative for
oil, even if OPEC decides to make no changes to production. Every time Hugo
Chavez of Venezuela or Mahmoud Ahmadinejad of Iran grab the microphone it could
move the oil market without either actually doing anything to his countries
overall production. Brown's speech in 1999 signaled to markets that the
Bank of England would be looking to diversify their reserve holdings by selling
some of their gold reserves. At that time, the Bank of England was not
in the top 10 of countries holding gold in reserve and are now at number 18.
A similar speech today wouldn't rattle the gold market much at all. Yet
even though the sales hadn't taken place at that time and eventually finished
up over two years later(!), the damage to the market had been done, simply
because of a speech by a politician...supply and demand be damned.
* * *
The easiest connection to make about the gold/oil/politics relationship is
the affect on prices from geopolitical tensions. When wars are being waged
and damaged to the global economy is threatened, investors retreat into gold.
It's the natural hedge because of it's ability to retain value regardless of
what is occurring across the planet. So what in the current state of affairs
has changed so much over the last three months? If anything, I feel safe
venturing the idea that things have potentially gotten worse. Just because
things are relatively quiet, doesn't mean that tension has abated. I'd
prefer to see gold go up simply on supply/demand issues and because it's exerting
it's usefulness as a fourth global currency, but part of that demand for gold
will always come from its ability to shelter investors from geopolitical tensions.
To summarize recent events, the Israeli/Hezbollah conflict has ended, but Hezbollah
wasn't disarmed and Middle Eastern pundits believe that their standoff has
only served to embolden their resolve to continue attacking Israel in the future.
Iran has continued to say to the UN than they will not stop enriching uranium
for nuclear uses. The UN and US response so far has been to say "Ok,
we'll give you another month to comply. THEN you'll have to start." The
deadline for complying with UN resolutions have come and gone multiple times
with no action or resolution. Hugo Chavez is so iron clad in his distrust
of the US government that he walked into the UN last week and called our President
the devil and threatened to sell all of his oil to China instead of the US
(Venezuela is one of our largest suppliers of oil in the US). It really doesn't
matter now if you're a Democrat, Republican, Libertarian or other, the Iraq
situation has turned into a complete mess that will not likely be solved any
time in the near future. Nigerian militants have continued to attack oil infrastructure
in their country. China has decided to thumb their nose in our direction
in response to repeated calls to revalue their currency which they regularly
manipulate in order to enjoy a good import/export relationship with the US.
Russia has turned into the Wild West with the recent assassinations of a deputy
central bank governor and the head of BP's oil operations in the country. North
Korea is preparing to begin a new round of nuclear missile tests. Without
using too terrible of a metaphor for us New Orleans folks, it's more like we're
in the eye of the storm right now. Things seem very calm around us and
that's not necessarily a good thing. The US government has just decided
to adopt the policy at present of ignoring global tensions rather than escalate
them by firing back at rhetoric and the lack of compliance.
* * *
Politicians are well aware of the SHORT TERM influence they can have over
both of these markets and certainly seem to be wielding it at this time. There
has been a great deal of speculation recently that the White House is keeping
oil and gas prices low right now in order to secure the November elections
and stay in power. While the OPEC production figures and potential decision
to cut production will be THE event to move the oil markets, in the meantime,
things seem to be happening behind the scenes to at least influence where prices
go in the short term. One of the real shocks to the market that most observers
seem to have missed is the tweaking of commodity indices by Goldman Sachs and
how this affects the market in the short term. Here is quick note from
James Turk explaining this phenomenon.
FIDDLING AT THE PUMP My contempt for the federal government seems to be growing
daily. Here is their latest disgusting caper.
The King Report published by M. Ramsey King Securities, Inc. on
September 22 made a very interesting observation about a report in the previous
day's issue of The Wall Street Journal,
entitled "Some Investors Lose Their Zest For Commodities." Here's
what the King Report says: “The article notes that over that
past few months, commodity funds have been liquidating commodity holdings.
But here’s the stunner: ‘…consider the Goldman
Sachs commodity index, one of the most popular vehicles for betting on raw
materials. In July, Goldman Sachs
tweaked the index’s content by cutting its exposure to gasoline. Investors
tracking the index had to adjust their portfolios accordingly - which sent
gasoline futures prices tumbling’.”
The King Report goes on to say: “Ergo unleaded gasoline prices collapsed
in August and September”, which I note is very interesting timing.
Here’s what one astute market analyst had to say about it:
“Here we have Goldman, qua keeper of the commodities index, manipulating
markets simply by adjusting index components. It is noteworthy in several
respects. First, we are used to the notion of them front running market sensitive
information announced by third parties, but here a glorified hedge fund - albeit
one dominating central banks and finance ministries worldwide - maintains market-moving
indices itself. Second, it lends credence to the theory that the current well-publicized
commodities decline is just a well-timed, well-orchestrated head fake to
benefit the incumbents in the run-up to the midterm elections - someone noted
recently that Bush's ratings vary inversely with gas prices. Third, it challenges
our creativity in demonstrating that there are more ways to paint the tape than
are dreamed of in our philosophy. Surely the burden of proof now rests
with those who proclaim the existence of coincidences in today's "markets",
which routinely act in defiance of all logic and experience. Finally, it
makes you wonder what other tricks we'll see from Hank's boys in the weeks
ahead. Lord help us.”
Gasoline prices here in New Hampshire are down to $2.39 from over $3. So
I wonder what other gimmicks ex-Goldman CEO and now Treasury Secretary Paulson
has up his sleeve to keep gasoline prices low until Nov 8? There has been a
bounce in President Bush's poll ratings, and the drop in gasoline prices has
no doubt helped. I have read that the Bush administration is pulling out
all of the stops to avoid losing the House in the November elections. Apparently
some of the administration insiders are worried that a Democratic controlled
House will initiate impeachment proceedings. So it seems reasonable to be prepared
for more surprises from Mr. Paulson.
Another interesting recent move by the US government affecting oil prices
has been the decision to wait until 2007 to begin restocking the Strategic Petroleum
Reserve supplies.
Energy Dept. to delay purchases for emergency oil reserve
ASSOCIATED PRESS
5:59 p.m. October 2, 2006
WASHINGTON - The Energy Department will hold off purchases of oil for the
government's emergency reserve through the upcoming winter, the department said
Monday. The department said it will not try to recover 1.7 million barrels of
crude oil that it loaned refineries a year ago after Hurricane Katrina, nor
would it seek to purchase additional oil for the reserve until next spring so
as not to take oil off the market during the heating season.
After the hurricanes last year, the SPR began loaning oil to refining companies
who were not producing enough themselves to satiate gasoline demand. These
loans were meant to be short term in nature and expected to be "repaid" by
the refining companies on a rolling forward basis. In other words, they've
pushed off the return of oil to the SPR in order to keep the market as supplied
as possible over the next few months. While this won't be a huge impact
to the oil market, it's just another aspect the government can control to keep
prices bottled up in the near term. These aren't the mental calisthenics
of conspiracy theorists. These are actual occurrences in the market that
are for the short term, affecting oil supply to the US market and indirectly
the entire interest in the commodity complex.
* * *
Where the politicians do have the ability to indirectly affect the gold price
outside of making a Bank of England type statement to the market, is by moving
interest rates up and down to impact money supply into the marketplace. I'd
quote some information on M3 monetary supply, but the US government stopped
keeping track of that statistic last year, which casts the largest net for
comprehending total monetary supply it the system. The last few pauses by the
Federal Reserve have been a big positive for the price moving forward, but
it certainly hasn't been reflected through increased prices. What we have in
front of us now however is a Fed who will need to start cutting interest rates
in order to avert a crash landing for the US economy.
Not that we're hoping to
see a crash landing of the economy that will rush buyers into the gold market,
but put it into this context. The gold and oil prices were sky high in May
and the Dow was treading water. Every pundit was talking about how we would
see a new age in commodities and the M&A
activity began. Now we've seen a flip without commodity prices crashing
(I'll call it taking a nap). The Dow is at an all time high and everyone
is talking about how we'll see a 12,000 handle on the Dow in weeks. This
is the time when the smart money starts moving in another direction.
In so much as gold and oil can be corralled in the short term, by doing so,
the politicians are setting the stage for an even more impressive move to the
upside after the elections. We're moving into our seasonal sweet spot
for precious metals markets. It's taken some more patience than initially
expected to pull out of the summer doldrums, but the precious metals markets
are coiling right now like a tight spring. Hold on for when we see the
start to the price increases. They're going to come fast.
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