Gold, Crude Decoupling?

Gold, Crude Decoupling?

Quotes for gold and silver have taken quite a leap from Wednesday’s punitive lows, hinting that the so-far 10% correction from mid-July’s $1,000 top may be as bad as it gets. We’d been expecting the weakness to continue for at least a little longer, with precious metal prices getting dragged down for another day or two by sagging speculative demand for crude. Our target for October Gold was 874.10, and even though the futures will need to surpass 935.20 to invalidate that target, it now appears as though Wednesday’s 902.70 bottom may have exhausted sellers.

Coming off that low, bullion surprised us on Thursday by continuing to rebound $10 even as oil quotes were falling a further $2.50 per barrel. This is an encouraging sign for those of us who have been expecting prices in the two sectors to decouple, with bullion going higher, oil and gas lower. After all, why should gold and silver be hostage to the collapse of a speculative bubble in energy resources? We’re convinced there’s plenty enough oil out there and that quotes are about to chase falling demand down to $60 a barrel as global recession takes hold. Demand for bullion, on the other hand, comes not from a handful of nutty speculators, but from untold millions of investors who are gravely concerned about the terminal condition of the dollar.

A Bell-Ringer

The irrational zeal of oil bulls showed itself unmistakably a while back when the price of crude continued to soar even as American motorists were reportedly cutting back drastically on their driving. Although this would have significantly reduced global demand for crude at the margin, traders at first ignored the warning signs. But if we needed to hear a bell ring to announce The Top in oil, it came last week with the blow-up of SemGroup, a Tulsa-based company that filed for bankruptcy after losing more than $2.4 billion on energy contracts. Reportedly, the $148, highest-ever price paid for crude was due to the liquidation of SemGroup’s short position.

This is how speculative bubbles frequently end in stocks and commodities – with a highly leveraged player getting liquidated from a short position at the very top. Some old-timers may remember that the casino-stock mania of the late 1970s ended with a hedge fund manager named Wilson getting liquidated out of a short position in Resorts International that he’d ridden from $10 to $200. No one ever paid more for a share of Resorts than Wilson, apparently, and we wouldn’t be surprised if SemGroup achieves the same, dubious distinction in crude.

Bullion’s Season

That’s how the game works. And now, we are predicting that oil prices will continue to drop even as gold and silver get revved up for the traditionally bullish autumn months. If the shadowy scoundrels who have worked so hard to suppress the price of gold have barely managed to hold it below $1000 in the “off-season,” just imagine what precious metals are going to do with seasonality about to shift powerfully on their side.