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BookmarkIn the first half of the year, the HUI Gold Mining Index turned in a 22 percent performance and oil rose 14 percent. In that same time the Standard & Poor’s 500 Index, the central planners’ favorite, rose 6 percent. A much broader stock index, the Russell 2000, generated a modest 3 percent gain.
In the third quarter the central planners fought back with their apparently unlimited and unregulated arsenal of derivatives to extinguish the outperformance of the HUI and oil. The HUI is now showing a negative performance of 4 percent and oil is now negative by 2 percent. Despite all the hoopla we see on TV about the performance of stocks and despite the efforts of the central banks to print money to buy stocks, the S&P 500 remains unchanged since the end of the second quarter. The Russell 2000 Index stands negative by 5 percent.
The message was clear and that was to destroy the outperforming asset classes and prop up the flagging S&P 500. The Russell 2000 clearly was not a focus of the central planners as it is not part of their optics that everything is just swell in the general economy and the stock market.
What makes this so ridiculous to anyone with an IQ greater than single digits is that the supply and demand outlook for the precious metals and energy has never been better for the longs. China and Russia continue to be voracious accumulators of both metals. India has also come roaring back as imports of both gold and silver are surging. This comes when the resources that provide the incremental supplies of the metals are becoming harder to find with lower-quality reserves.
The low prices engineered for the metals are also forcing mining companies to curtail exploration and mine closings cannot be far out in the future. So does a massive increase in demand combined with a secularly declining supply translating into lower prices seem rational? Clearly it is not. It raw manipulation.
As for energy, the meme that the press promotes is that there is an oversupply of oil due to a global economic slowdown. The global demand for oil has not abated. While the developed nations might be using less of it, the so-called “non-OECD” developing countries continue to consume more. Most people are focused on the business cycle aspect of demand. However, there are billions of people desiring to move up the economic ladder. That demand will continue to be persistent, despite the business cycle for the developed countries, as one cannot achieve a higher standard of living without oil.
As for supplies of oil, the producers are struggling. Production in unstable areas such as Libya, Nigeria, Iraq, Yemen, and Venezuela are way below former levels and predictions. Saudi Arabia recently announced a 400,000-barrel-per-day cut in production as part of a plan to defend the $100 price. Virtually all global spare capacity resides within Saudi Arabia. They also have their own problems with aging fields and increased domestic demand.
Russia announced a major new find in the Arctic region, but the oil companies servicing the Russians have been ordered to cease such activities as part of sanctions. As with the metals, there is no excess supply issue. Supply is likely to constrict, not expand. It simply is manipulation designed to bring down the price of oil and gasoline prior to the U.S. elections and to punish the Russians.
The recent strength of the dollar has been a problem for holders of precious metals and oil. The announcement this past Friday about the number of jobs created and the unemployment rate gave another boost to the greenback. The dollar lurched higher on the news even though the reported statistics are not reflective of a healthy economy, just an increase in low-wage jobs and a declining unemployment rate due to people ceasing to look for work. Getting the headline unemployment rate below 6 percent before the election helps appearances and reminds us of the 2012 election, when the unemployment rate magically dropped below 8 percent in the final report.
A surging, parabolic dollar and falling oil prices might be good strategy in the currency and state-to-state conflicts raging around the world, but the situation is going to be very harmful for the multinationals deriving revenues in non-dollar currencies and the continuing energy resurgence in the U.S. The falling oil price has brought the Saudis into the fight between the West and Russia.
Given the vicious declines in the last quarter for precious metals and oil, one would expect an equally dramatic reversion to the mean or higher. It has happened twice already this year.
Much has been made of the technical analysis surrounding precious metals and other markets. However, in a manipulated world, technical analysis probably is not that useful. What we can do is see how events unfold. If the manipulators have an agenda of lower prices, we will probably see that. If other forces declare an end to this round of smashes, we could see a violent rebound in both asset classes. Unfortunately, only a handful of “geniuses” know which levers are being pulled and by how much.
For oil, the days are gone forever when supply interruptions could be met with increasing production. For gold, gone are the days that vaults could be looted to augment supply to physical buyers. We are at the mercy of the derivatives in what hopefully will be the short-term. People used to say that the “cure for high prices is high prices,” meaning that supply would come onto the markets to restore a lower equilibrium. In our day, we need to say that the “cure for low prices is low prices” as remaining supplies of precious metals are swept away to vaults in the Far East. Time and history will tell the tale.
