Volatility in Crude Oil, Gold To Increase With Money Supply

As we noted to readers of Outstanding Investments in a note on Saturday, narrowing leadership of a rising market is a tell-tale sign of a late-stage bull market. In fact, advancers led decliners everyday of the week last week on the New York Stock Exchange.

Crude oil closed at its highest level in eight months as news filtered out of Saudi Arabia about a thwarted al-Qaeda attack on Saudi oil facilities. Saudi Arabia is the world’s second largest producer of crude oil, behind Russia, and home to the world’s largest oil reserves.

The big scare in the oil market-authentic or not-also sparked a turn-around in gold prices and aborted the dollar’s late-week rally. The U.S. currency had rallied Thursday off its historic lows against the euro has traders liquidated long-gold positions and took profits. But the news out of Saudi Arabia, coupled with the weak first quarter GDP report from the U.S. caused traders to re-evaluate their stance toward the yellow metal and enter back into the market as buyers. Gold traded as low as US$670.70 in the Friday U.S.
session, but closed the day nearly ten dollars higher.

Gold, like the rest of the market, exhibits increased signs of volatility. This is mostly the result of the huge pools of capital moving around the world with lightning speed. On the upside, it makes for what we’ve called “flash bubbles” in certain asset classes and sectors as hot money pours in.

On the downside, liquidity can disappear just as quickly, leading to large one-day price declines, especially in the equity markets (not as severe in the underlying commodity market.)

Bullish for gold is the low-level of central bank sales being reported out of Europe and continued accumulation by investment managers. Bearish for gold is the short-term bottom in the U.S. dollar. Any dollar rally will lead to a stall in gold’s rally near $700.

The important thing to remember is that volatility and money supply will likely increase this year. Both these factors will lead to increasing confusion and uncertainty over the direction and health of the markets. While gold will suffer from this uncertainty (especially gold stocks) it remains the best long-term way of riding out the credit boom sweeping the globe, and having something left to show for it.

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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