Weak Dollar Wednesday – Charging More for Less

Courtesy of Phil’s Stock World

Over $1.50 for the Euro this morning!

The Pound ran up to $1.675 and, as soon as the Nikkei closed (up 40 points), the dollar dove to just 87.5 Yen. That sent gold flying up to $1,180, copper to $3.18 and silver to $18.80 but oil couldn’t get back over $76.50, which is strange because the last time the dollar was this low oil was $140 a barrel. Why have the commodity speculators abandoned oil and moved on to metals?

For one thing, energy trading is now under Congressional scrutiny – as well it should be since it is a forced tax on every man, woman and child on the planet. Copper prices don’t affect anybody since no one is building anything anyway and pennies sure aren’t worth saving since you need 5 of them just to buy a piece of gum these days. Silver has industrial uses but there’s not much industry with Industrial Production at less than 80% capacity so no one is complaining (are there any workers left to complain?) about that price and gold consumption is off 34% from last year so the 43% rise in price since last year isn’t tapping more overall global dollars – speculators are just getting much much less for much much more.

Oil collapsed last year because, when push came to shove, people simply couldn’t afford to buy barrels of oil for $140, or $100, or $80. The problem with trying to manipulate the oil market is 86M barrels more come out of the ground every day, whether you want it or not and if people stop consuming then it has to be stored and that can get expensive. As it is now, global stockpiles of crude products are at record levels and it is possible that the US is literally out of room to store natural gas despite massive production cutbacks from cartel members like CHK, XOM and EOG.

So manipulating the price of oil and natural gas gets tough as demand falls off but only 800 tons of gold were consumed in all of Q3, down from 1,206 last year, when gold averaged $825. In India, the world’s largest consumer of gold, demand fell about 50% from 271.2 tons to just 137.6 tons. China picked up the slack as the government stockpiled metals (just another speculator) and demand there went from 116.9 tons to 128.6 tons so a 10% increase in Chinese demand to WOW the investors into thinking there is no stopping this train.

If no one is actually buying gold (a proxy for all our metal speculation) then how does the price go up? Would you be surprised if I said speculators? To keep things simple, we aren’t going to talk about China’s stockpiling or Indias recent $200Bn purchase or the sudden craze to buy gold coins (but really people, does no one remember the last gold craze?) – let’s just talk about one of the many, many speculative ETFs out there – the SPDR Gold Trust (GLD). Out of the 2,400 tons of gold purchased this year (1/3 less than last year) GLD has bought 500 tons of it. This checks out as if we take that 500 tons out of the rest of global demand, we see that only 1,900 tons have been bought outside the ETF, so the whole world’s consumption is down 50%, roughly the same as India’s.

$10Bn has poured into GLD in the past 12 months, causing the ETF to purchase 10M ounces of gold – more than India’s total annual consumption and the year isn’t over yet. That gold has no industrial or consumer use and none of the people trading the bits of paper (if they even have the paper) with GLD stamped on it or staring at GLD on their computer screens have any intention at all of ever owing the gold themselves. One would think, logically, that a stockpike of 1,100 tons of gold that nobody really wants may cause a problem at some point down the road – but only if people ever wise up so nothing to be too concerned about I suppose….

This is not an essay on gold, it’s just an example of all the idiocy that’s going on in the commodites pits at the moment. Demand is way off but the producers of gold cut back production and the holders of gold encourage speculation to spur demand and the brokers on Wall Street see a way to get another speculative bubble going so they can make a quick buck and PRESTO! – we have the same irrational behavior that wiped out investors last year only this time it’s shiny bits of metal nobody actualy wants instead of sticky black goo that nobody actually wants so it must be different. Last year oil was going to $200 because demand was infinite and supplies were falling. This year gold is going to $2,000 because the money supply is infinite and demand for gold is rising.

It’s the same old story again and again but, as PT Barnum used to say, there’s a sucker born every minute. But PT Barnum said that in the early 1800’s, when there were only 1Bn people on the planet. That means there are now 6.5 suckers born every minute and that’s 9,360 suckers a day and 3.4M brand new suckers every year – more than enough to account for 10M ounces of gold puchased by GLD speculators – problem solved!

So things seem to balance out quite nicely, there are plenty of suckers to pick up the slack when real demand fails us. Imagine if PT Barnum had CNBC at his disposal – he’d be unstoppable! Sadly, there was no energy or commodity futures market at the time for him to exploit but his book was the roadmap for what modern day hucksters set up in his wake. Playing the commodity markets is fine but keep in mind what Barnum said about speculation in his day:

A man who is all caution, will never dare to take hold and be successful; and a man who is all boldness, is merely reckless, and must eventually fail. A man may go on “’change” and make fifty, or one hundred thousand dollars in speculating in stocks, at a single operation. But if he has simple boldness without caution, it is mere chance, and what he gains to-day he will lose to-morrow. You must have both the caution and the boldness, to insure success.

We were bold last week and took some speculative upside plays in gold and yesterday we used a little caution and put in an order to cover with a bullish spread on GLL (April) as well as offering .50 for 5 GLL Apr $11 calls in our $100K Portfolio. We didn’t get filled yesterday but hopefully today and, once those are filled, we’ll look at a possible upside play on UGL, as we will have our defenses in place. Just because we think the move is silly, doesn’t mean we aren’t willing to make money on it! While people buying GLD for $114 per share may hope to make 50% if gold goes to $1,800, we’ll be looking at the UGL Jan $49/53 bull call spread for $2 ($200 per contract), which will gain 100% if gold goes to $1,250. Speculation is all well and good, but you don’t have to be an idiot about it…

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