The Trade of 2008: Crude Oil or Gold

Not everyone thinks there’s thirty dollars of premium in oil. Well, twenty dollars now.

A reader wrote in: “How can Dan Denning, (or anyone), do a calculation of fear premium? I call your bluff. Show us your working [sic]!”

What is this, sixth grad maths?

Our main point was that anytime the mainstream press calls for much higher prices, a correction is imminent. In oil’s case, it seems to us that $70 or $60 oil is more likely this year than $150 or $200 oil. That’s not to say oil won’t get to $150 eventually. But that in 2008, the economic news suggests lower growth, lower demand, and possibly lower commodity prices.

Countering this is money printing like mad by the U.S. Federal Reserve, which will lead to a weaker greenback and higher inflation. So what’s driving the oil price? The reader is right in the sense that you can only look at the speculative long positions in the commitment of traders report to tell you how bullish/or bearish traders are. You can match this up with the oil price. It is a forecast… not a Euclidian proof.

If we were trading it-and we’re not-we’d say the financial demand for oil is going to come off the boil shortly. This could be dead wrong. Traders may prefer to be long oil and short the dollar and the Dow. Or long oil instead of long gold. In any case, here are the two charts we eyed. First is WTI with a weekly close. Second is crude activity in the commitment of traders report.

Divining the charts is more of an art than science. And we are not a technician. But we’d say the mid-2007 rally in crude was both U.S. dollar weakness and an increase (visible on the chart) in the net long position by speculative traders. Continued dollar weakness kept the crude price moving up. And a recent spike in the long position of large speculators drove the oil price from $US90 to $100.

And from here? It will be an arm wrestle between a U.S. recession and dollar weakness. Which force will have more impact on the crude price? Dollar weakness encourages speculators to go long crude. And in basic terms, the dollar will fall relative to tangible assets. That’s oil bullish.

But the market is clearly becoming risk averse. Which will have the greater fear premium, crude or gold? Gold has no role in the real economy. Crude does have a role in the real economy… and that economy is slowing. But one reader thinks crude is the better bet.

Hi Dan,

The newsletter is great…..However I don’t share your enthusiasm about gold……..The problem with gold is it relys [sic] on people thinking it is valuable… many ways it is the ultimate bubble……it may continue to go up but not based on fundamentals, ultimately no one needs gold and if times get really tough people may abandon it completely….surely energy is a far superior investment…the world needs energy and supply is not keeping up with demand.. Oil is looking like it has peaked in which case supply is going to contract……I live on a farm, Energy is essential for fertilizers, pesticides, agricultural machinery as well as transport and many other uses…….gold = paper weight, door stop, pave the patio, etc…..Energy is destined to be the new international currency……many times I have read that gold is easily stored and oil is not…just watch the wealthy buy up oil fields and produce it at the rate they require money…..


Good points. We’d love a gold doorstop. But you can carry a doorstop in your pocket too (provided the stitches are strong). Have you ever tried carrying around a liter of petrol and trading it for food?

Money is a commodity. Gold is a commodity. Gold makes excellent money because it’s the same everywhere, it doesn’t erode or rust, and you can cut it into pieces and put it in your pocket. That makes it the most useful commodity to use as a medium of exchange, which is why people have been using it as such for thousands of years. See Lord Rees-Mogg’s essay: Purchasing Power of Paper Money Declines, Gold Price Climbs

Oil is a strategic commodity, a weapon if you will, which has lately become a policy tool. As such, it is being systematically nationalized and used as leverage in the various policies of centralized nation states. On the equity side, we continue to believe it is a long-term buy. As a trade, we might short it, if we traded (which we don’t.)

But when it comes to personal wealth or putting some of your capital into a raw commodity, we wouldn’t substitute anything for gold, except maybe silver. Most likely we’d have some of both… and wait to see how much worse things get in the world’s financial system before they begin to get better. We reckon you’ll have to wait most of this year to find out.

Dan Denning
Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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2 Comments on "The Trade of 2008: Crude Oil or Gold"

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benake is cutting 50 basis points, and there is a business investment scheme. but the printing presses are running overtime….

inflation !!! do the math.

I’m starting to wonder if Bernanke’s plan is indeed to intentionally instill a sense of fear and unknown at this moment in time, and that the Fed’s hands are tied.. Real fear that the US economy is up the spout will allow the price to come off oil in the short term, and maybe keep it down… This in turn allows the numero uno driver for inflation to run away for a while.. allowing further deep rate cuts without the ugly bear of stagflation popping his head out. Maybe Mr Ben isn’t as stupid as he looks.. Keep people thinking… Read more »
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