Buy Gold, Sell Oil

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The Daily Reckoning | Thursday, September 27, 2012 The financial press reaches into its “Box of Explanations”... Why crude oil prices could tank over the next few years... Plus, Chris Mayer on which hard asset stands to benefit the most from Bernanke’s money printing campaign, and more... ------------------------------------------------------ Planning on buying a smart phone, tablet, or HD TV? You may want to wait... Industry insiders at some major electronics companies know something you might not... And if you did know this was happening, you probably wouldn’t want to buy a smart phone... tablet... or HD TV for at least two more months. Find out why in this special presentation.   Quote of the Day... “How pale is the art of sorcerers, witches, and conjurors when compared with that of the government’s Treasury Department!” — Ludwig von Mises Programmed Response How Financial News Sources Make Sense of Market Moves   Eric Fry Checking in from Rancho Santana, Nicaragua... As we were putting together today’s edition of The Daily Reckoning, the prices of gold and crude oil were both down more than one percent. MarketWatch blamed Europe. “Oil futures struggled to hold on to $90 a barrel Wednesday, less than two weeks after topping $100,” the financial news source explained, “under pressure from renewed concerns about the euro zone...” Maybe so...or maybe “renewed concerns about the euro zone” was just the phrase MarketWatch blindly pulled out of its “Box of Explanations.” You know the ones. You’ve read them hundreds of times. “Share prices slid this morning due to...” A) “...flare-ups in the Middle East.” B) “...today’s disappointing [insert your favorite economic report here].” C) “...riots in Greece.” D) “...anxiety that the economy is not responding to Fed stimulus.” E) “...renewed inflation fears.” F) “...renewed deflation fears.” But yesterday’s financial offending data point was the shaky eurozone. “Spain’s borrowing costs surged on Wednesday,” MarketWatch explained. “The difficulties Spain faced on international bond markets come as a second night of protests against austerity measures rocked Madrid and the region of Catalonia announced elections that could potentially lead to independence of the region, Spain’s economic cornerstone.” “The renewed escalation of the debt crisis in the euro zone,” chimed the research team at Commerzbank, “has sparked gloomier sentiment on the financial markets once again and is also putting oil prices under pressure,” So there you have it; apparently the folks at Commerzbank have their own “Box of Explanations” for the day-to-day noise in the financial markets. Whatever the real causes may be, the prices of gold and oil both slipped during the early part of yesterday’s trading. But only one of these trends is likely to last, predicts Chris Mayer, editor of Mayer’s Special Situations. While Chris believes the oil price is likely to continue trending lower, he foresees a bold move to the upside for our favorite yellow metal. Chris, who almost never uses a Box of Explanations, cites several reasons why the recent drop in oil prices is likely to pick up steam over the coming months...and why the gold price is likely to top $2,000 within the next few months, in today’s guest column, below...   External Advertisement American Apocalypse 2012 Social Security: TERMINATED. Medicare: CANCELLED. Our cities: ABLAZE. Our families: ENDANGERED. Startling new video evidence that Washington is preparing to confiscate your wealth and abolish many of your most cherished personal liberties... Click here to watch... The Daily Reckoning Presents Buy Gold, Sell Oil   Chris Mayer Yeah, yeah, I know...gold and oil are both hard assets, but that doesn’t mean they will both provide a reliable hedge against the inflationary trend Ben Bernanke is creating. In short, I like gold much better than oil...at least for the next couple of years. The best reason to own gold is also the most well-known reason. The US government prints a lot of money, as the nearby chart plainly shows. In round numbers, the Fed conjures about 55 million fresh dollars into existence every hour. By contrast, the entire world’s gold mines only manage to extract about $15 million worth of gold from the earth every hour and US mines only extract $2 million worth of gold per hour. In other words, Ben Bernanke creates US “money” about 27 times faster than US gold mines. Wild stuff. It is hard to fathom a readjustment of gold to keep up with the amount of money created. But that readjustment seems inevitable. Obviously, inevitable is not the same thing as imminent. But there is good reason to think the gold price will top $2,000 fairly soon. The Deutsche Bank report shows how the gold price has pretty much marched in step with the Federal Reserve Bank’s money printing since 2000. Based on all this kind of statistical analysis, even the mainstream Deutsche Bank predicts gold will top $2,000 in the first half of 2013. The obvious take-away is to own some gold. Second, look at gold stocks — which have lagged the metal for some time and seem to be showing some life finally. The GDXJ, which is an exchange-traded fund made up of small gold stocks, is up over 25% since early May. It remains a good way to play a gold stock rally if you don’t want to take on the risks and frustrations of owning individual gold stocks. If You Own Any of These Gold or Silver Stocks*... Then you may be eligible to instantly collect a cash payment of $784, $1,324, or $2,345 — without having to sell your shares. (*List also includes technology stocks, retail stocks, and more. For a complete list of all 3,097 participating stocks, see this report.) Meanwhile, the outlook for the price of crude oil seems much less upbeat. In fact, I think the price of crude is likely to tank over the next couple of years. I have said before that I think the oil bull market is on its last legs. In this, I’m just playing the odds. History and economics dictate what those odds look like. For example, we know stock markets don’t trade for 30 times earnings — as the US stock market did in 2000 — for long. That was a figure far above the long-term average for stocks. And stocks subsequently crashed. We know housing prices can’t sustain a price of 32 times the cost to rent them — as they did when housing prices peaked in 2006. That was again far above the long-term average of just 20 times. Housing prices later crashed. Similarly, we can conclude that the current oil price — which is currently 230% above its long-term inflation-adjusted price — won’t last either. The current bull market began in 1998. The average oil price in 1998 was just $11 per barrel. So the current bull market is 14 years old. And the US oil price is nearly nine times what it was in 1998. It’s been a great run. Just how great you can see by looking at the previous chart. Crude oil is 230% above its long-term average in inflation-adjusted terms. Besides, it is not as if we can’t see what will slay the oil price. There are many sharp swords all over the place. Let us consider demand. The biggest economies on the earth — the United States, Japan, China and the EU — are all slowing down or contracting. Let us consider supply. New technology continues to unveil giant sources of supply once thought uneconomic. David Fingold, a portfolio manager at DundeeWealth, writes: More oil? It turns out that on top of US oil shale, Alberta oil sands, West Africa and Brazil there’s yet another massive source of oil that may be coming to market. It’s called the Bazhenov Shale, it’s in Russia and it’s big. I’m no geologist, but I’ve been told it’s similar to the Cardium in Alberta. Exxon starts drilling there next year. The energy boom of the 1970s ended when the North Sea and Alaska North Slope came on line at the same time. It seems likely more than two major fields will hit the market this decade. It’s hard to see oil becoming relatively scarce anytime soon. The Bazhenov shale could be another game-changer for the oil industry. It is yet another massive oil source to add to a list that keeps getting longer as new technology cracks open sources once thought unreachable. People will come up with all kinds of reasons to discount the new oil supplies. But history shows that human beings are creative and tenacious. I was among the early investors in the Bakken in 2008. I recommended Kodiak Oil to the subscribers of Mayer’s Special Situations. The stock subsequently doubled. Back then, I remember hearing some geologists scoff at the Bakken and its potential to produce significant amounts of oil at low costs. Yet, here we are. Even now, I think people still underestimate the amount of oil the United States could produce. On oil, I must disagree with my friend Byron King, who writes Outstanding Investments and (in a revision to his older “Peak Oil” views) now says we’re at “peak cheap oil,” or the end of cheap oil. I could not disagree more. So one thing is certain; one of us is correct. I say it is also a certainty that oil will be cheap again. And then it will get expensive again. Then, cheap again. And so on. In other words, just like any other commodity, it will continue to boom and bust and go through cycles. Timing is the great uncertainty. I am interested in putting my money in areas where the odds favor me. Increasingly, I don’t see the odds favoring me when it comes to oil prices. To me, oil is much like stocks in 2000 or housing in 2006. It’s overpriced and due for a sizeable selloff. Regards, Chris Mayer for The Daily Reckoning Editor’s Note: Chris always seems to have his finger on the pulse of the world’s up-and-coming commodity stories. From getting in early on the Bakken, to checking out potential plays in remote regions around the globe, his boots-on-ground research consistently makes serious gains for his loyal, perennially well-informed subscribers. And right now, he’s got an incredible report that says US oil reserves could quadruple thanks to a little-known technique being hailed as a “magic drug” in the industry. Click here now to check it out, and start grabbing some of the finest analysis you’re likely to find, from one of the most respected names in the business. -------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com   Downside: After the Returns Stop Diminishing, Part II Downside: After the Returns Stop Diminishing Too Much of a Good Thing, Part III Currencies Lose the Lofty Levels Seen After QE3 Announcement Debt Auctions in Spain and Italy to Test the Waters Currency Traders Don’t Trust the Global Recovery The Daily Reckoning: Now in its 11th year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists. Cast of Characters: Bill Bonner Founder Addison Wiggin Publisher Eric Fry Editorial Director Joel Bowman Managing Editor The Mogambo Guru Editor Rocky Vega Editor Additional articles and commentary from The Daily Reckoning on: Twitter Facebook DR iPhone APP To end your Daily Reckoning e-mail subscription and associated external offers sent from Daily Reckoning, cancel your free subscription. If you are you having trouble receiving your Daily Reckoning subscription, you can ensure its arrival in your mailbox by whitelisting the Daily Reckoning. 2012 Agora Financial, LLC. 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