My Take on Gold and Oil Prices
By Byron King | June 30, 2011 |

Last week, I was in southern Africa visiting energy and mineral projects. I spent most of this week in Germany and Austria, visiting people and companies that deal with energy and mineral projects.

I’m always looking for ideas — about energy and minerals — that you can use, and in which to invest, to stay ahead of the economic trends. Today I’d like to share with you my thoughts on gold and oil.

For starters, there’s one thing I do every day. It’s my quick-and-dirty economic barometer.

That is, I routinely check the price postings for gold, silver and oil, among other important substances. These enjoy a global market, and that market has vast collective knowledge. I let it work for me.

There could be all sorts of “screaming headline” news about this or that. But if the price of gold or oil isn’t moving? Maybe that so-called big news story isn’t all that big. Really, how much does it matter if some politician gets caught on Facebook with his pants down? Or all kidding aside, do the protests in Greece mean that the euro is doomed? I’m sure you see what I mean.

So what about gold? The price has been holding its own, down recently from the mid-$1,500s per ounce. No big moves one way or the other, hovering around $1,500 — a fine premium to last years prices around $1,250. To me, it signals that most people who buy and sell in the gold space don’t think that the world currency situation will get better soon. No matter what the central bankers say, there’s a lot of smart money sticking with the yellow metal.

Indeed, the price of gold has been drifting more up than down. This implies to me that people think things will get worse, but likely at a slow, if not measured, pace. You could analogize it to people just sort of idling casually toward the lifeboats. No panic. No need to run. But get nearer to a means of safety in case those bubbles near the waterline get worse.

Governments everywhere are still overspending, which means that debt will pile onto more debt. The future is grim. Smart money is holding gold. Hold your gold. Never sell the real metal. Hang tough with the mining company shares.

Look around. Certainly, in the U.S. and Europe — the traditional West — the debt picture is an endless scene of outlays, outlays and more outlays. All along, the interest bill is mounting. In the Far East, Japan has its own problems, what with 20 years of recession and now a body blow to the economy from the multiple nuclear meltdowns.

The typical groupthink government answer is just to spend, spend and spend some more. So what’s going on? Any benefit? For all the funds flowing via government paychecks, social transfers and general procurements, economic growth is stagnant on the best days. Where’s the net benefit from all this spending and the public debt that it’s causing?

Let’s ask the question another way. For every dollar of government spending, how much “new” GDP is being generated? How many new jobs? How much tax revenue, if not merely to service the future debt on that dollar of government spending? Is the culture of “spend, spend” a net positive? Are we breaking even?

I wouldn’t bring any of this up except to make the point that much of government spending is a net drain on economic activity. I’ve seen it in the U.S. I’m witnessing it firsthand here in Europe. Much government spending, and most of the recent blowouts in spending, doesn’t pay for itself in any sense, except that the political class can feel good about itself.

Truly, I’ve been picking up a lot of perspective from members of the international business community lately. When looking back across the water, things appear in another light. There’s a distressing common strain within many comments that I’m hearing.

Basically, the U.S. economy has evolved into something that most people above a certain age simply do not recognize. One German engineer put it this way. “There are pockets of excellence in the U.S. economy, like aerospace, heavy construction machinery, energy and the like. But more and more, these pockets are surrounded by a sea of social problems. The U.S. economy is like a ship with so many barnacles on the hull that it can’t make way through the water.”

The German guy is right. U.S. unemployment is 9% officially, and the unofficial number is likely double that. Then add in the underemployed and discouraged workers who are living at the margins. And what about the prospects for new graduates entering the work force?

If you’re a petroleum engineering major, you’ll do all right. But for most everybody else? Where are the “happy days”? Not, to use the words of the old song, “here again.”

Which brings us to oil.

There’s a strange disconnect between U.S. prices and the rest of the world’s. The U.S. is enjoying much cheaper oil, by something like $20 per barrel. That is, West Texas Intermediate (WTI) has been selling in the $90-100 range lately, while North Sea Brent is selling in the $110-120 range.

Meanwhile, gasoline prices across the world have been creeping upward, taking money out of consumers’ pockets. Spending more on fuel means spending less on everything else, which is generally bad for the economy.

So what’s the answer? According to news that just hit the wires last week (while I was sitting in the Munich Airport), the Obama administration has cut a deal with the International Energy Agency (IEA) to release 30 million barrels of oil from the U.S. Strategic Petroleum Reserve (SPR). This is a coordinated international effort to drive down high crude prices. The hoped-for effect is to revive the economic recovery in many of the world’s industrialized countries.

It’s a short-term gimmick. The U.S. oil will be released over the next 30 days, according to Energy Secretary Steven Chu. That’s a million barrels per day, which is just over 1% of daily world output.

According to Secretary Chu, “We are taking this action in response to the ongoing loss of crude oil due to supply disruptions in Libya and other countries, and their impact on the global economic recovery.”

So Secretary Chu is now secretary of Energy AND secretary of “Economic Recovery”? Something else is going on, so let’s think it through.

Looking back, crude oil prices moved over $100 a barrel in February, as revolution hit Egypt. Fighting began in Libya in March, depriving global markets of about 1.5 million barrels of light, sweet crude — although Saudi Arabia has made up most of the difference with its heavier blends.

Thing is, despite the absence of Libyan oil, there’s no true shortage of oil in the world. If you want it, you can get it. The problem has been the stickiness (so to speak) of the over-$100 oil price. Apparently, the administration and IEA want to try to shock prices downward and find a lower level.

The decision to release the oil comes as the world’s largest oil-using nation — the U.S., of course — enters the peak driving season during the vacation months of July and August. Oil and fuel prices are still stubbornly higher than they were before the Libyan crisis began.

OK, so I understand what Secretary Chu is saying. Really, I do. But wow. The SPR was supposed to be for strategic things like true supply interruptions, due to war or natural disaster. Not so that Uncle Sam can play at being a market speculator, just like the big guys at Goldman Sachs.

As for the Libya civil war? Yes, the war has stopped oil flow. But Libya is old news. We’re over 100 days into the “war,” which is not really a war — for which there’s no congressional authorization, by the way. Meanwhile, the Saudis are making up the difference. So what gives?

There’s NO global oil shortage. In fact, Saudi Arabia is ripping the pumps open. There are even rumors — in that well-known scandal sheet The Wall Street Journal — that the Saudis are considering opening the pumps more. They are considering driving oil prices down to choke the Iranian oil export income accounts.

Meanwhile, closer to home, there are 400,000 b/d of U.S. oil awaiting completions on wells already drilled, per a recent report by Halliburton (HAL: NYSE).

You read that right. There are literally thousands of wells that have been drilled in the U.S., mostly to hold acreage that would otherwise expire. But there are not enough fracking crews to do the completions.

So looking ahead, there’s a lot more oil that’s going to come out of U.S. wells alone. That’s negative for the futures market, in its own way. So again, why release SPR oil?

Somebody has an agenda here, and it’s not that there’s a lack of adequate supply of oil. Is it really as simple a thing as electoral panic within the Obama administration? They read the poll numbers and the relationship to $4 gasoline? Still, that’s old news too. Gasoline prices are declining.

I have to wonder if, since the Fed can’t cut interest rates any more (QE2 is over), they want to kick-start consumption by dropping oil prices. It may even save some friends at the usual places from imprudent speculation along the way.

Finally, cheaper oil is a gift to China. The largest marginal increases in oil use are coming from China, and cheaper oil prices, even for a couple of months, will only encourage more oil use, and encourage it faster.

From where I am right now, the SPR oil release makes little sense for American markets. Crude and gasoline inventories are above average. Crude and gasoline prices have been trending down for weeks, despite the loss of Libyan oil. The markets have already adjusted to this.

The SPR was intended to be used for supply emergencies. There is no supply emergency. And looking ahead, nobody knows what effect releasing SPR oil will have on markets over the long term.

This SPR oil release is a stunt, a temporary gesture that has no lasting benefits.

That’s all for now. Thanks for reading…

-- Byron W. KingSource: Daily Resource Hunter

 

Outbrain

 

Outbrain