I have a theory, only in extremes for higher oil/energy prices will a correlation between oil and gold will matter. In the creation of a new range, as many people are now saying oil is in a new range, in the extremes of new prices or the new beginning, there will be a correlation between oil and gold, the excuse being people are using gold as a hedge to inflation as oil defines its new range and makes higher highs. This may or may not be true, but the fact is, when there is an extreme or a new development of range, the media portrays bullish moves in gold as inflationary hedges in relation to oil. What really matters is that a correlation does exist. As we saw in the summer and a little before gold and oil were loosing its correlation. Gold had already made its highs in the 800's even further back, and any correlation between gold and oil was beginning to be less significant. But now, with oil entering new ranges, a relationship between oil and gold seems to have been revived.
To support this theory, economic conditions would also have to warrant a legitimate correlation. For example, currently the United States as an economic power is experiencing weakness. A weak dollar with a persistent need for Federal Funds rate cuts brings about perceived or apparent inflation. Apparent inflation being inflation that is actually occurring. Either way, if is not apparent or not, it will bring about sentimental fears which would cause a correlation between oil and gold or is what will be driving the prices of these commodities. The relationship being people buying gold as a hedge to whatever kind of inflation is there.
So in summation, in new ranges of oil or energy, you will find a correlation between oil and gold, if supported by economic fundamentals, where price in part, is ultimately driven by sentiment.
Fed Remarks:
Everything the Fed has said is pretty inline with my expectations. As usual the same slightly modified statement was made allowing Feds to remain on the fence to go either on hold or cut, as a protective measure for their reputations. Its kind of ironic how so many managers are always looking for accountability, and ultimately the Feds who are often perceived to be responsible for the performance of the economy, are never clear enough for full consensus on wall street of what the next decision of the Feds. Most interestingly, I believe there to be divergence in the equity index futures markets and the domestic equity markets. Yesterday and today the futures opened with negative fair values, and yesterday saw significant gains, and todays bullish sentiment seems to be showing the same upward price movement. I believe this to indicate that prices will not be able to sustain a break in resistance for a significant time period. Based off past federal funds trends and during times of crisis, more rate cuts will be seen. To support this idea is that the core cpi and ppi are relativity tame. And as i had naturally expected, they mentioned headline inflation stemming from commodity and energy prices during the speech, just to say it did pose "short term" problems, although commodities and energy may be stabilizing, which to me indicates further possible cuts.
"Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses," Kohn said in remarks to the Council on Foreign Relations in New York.
From what Kohn said,I feel there is room for further rate cuts, in fact I would not expect 75 basis point cuts (as some people are speculating) as the inflationary problems that would cause lots of volatility, which in part, the Feds job is to keep prices stable.
Looking back to times of crisis, 50 basis points were used as pre-emptive measures when the crisis first began, and then followed by a series of 25 basis point cuts as provided when necessary. As poor financial conditions still linger today, a series of smaller 25 basis points "should" follow as to maintain stability. Though not wholly unexpected to see pre-emptive measures since that is what Bernanke has done in the past, but as the effects of a larger cuts back in sept did not prove entirely useful as markets rallied and pullback to similar conditions previous to the cut.
This further supports my idea that the s&p 500 will remain within a range from now until the end of the year, as further cuts are due.
It's an interesting theory. I happen to agree that oil is in a higher range now, and that it likely won't be breaking out soon as $100 appears psychological resistance.
ReplyDeleteAn interesting thing about gold (and this is via statistics provided by a company that you know well that begins with the letter N) is that it hasn't ended any month at $800 or above. It may close there during the month, but on the monthly charts, a close $800+ has yet to be achieved. Looks as if it won't happen this month, either.
Again, though, the issue I think with this blog is accountability because you don't address the accuracy of your calls and try to spin it on occasion to your whims to justify a post that you wrote earlier.
On the one hand, this is typical Wall Street, as analysts always do this. So if that's your intention, keep it up. On the other hand, if you're aiming to work for an HF, then cutting losses is very important and you have yet to demonstrate that you understand the notion of admitting defeat, then moving on.
For example, obviously you were bearish at the beginning of this week, which theoretically would have cost a "reader" to miss one of the biggest rallies this decade, but that's alright. It's fine to miss those, but admit it, move on, tell them if you're going to add to shorts, whether to cover to then go long, etc. as when we're looking at a blog, we want to see a blogger who will be responsible on his/her decisions.
To focus now on the positive, also take credit for all the calls that are correct. This correlation between oil and gold has definitely been playing out this week, so regarding that you certainly deserve credit.
Anyway, that's all, if it's alright with you, I'll continue checking in on this blog as a favor to a certain buddy of mine. I actually enjoy reading it, despite my sympathy on the plethora of incorrect calls.