Gold and Oil: Staying the Course

 

Terrible day for the markets yesterday…

It all started with June crude oil futures down about $9.00 a barrel, the U.S. dollar up sharply and the precious metals down. June gold futures were down about $34.00 an ounce, bringing the metal back below the $1,500 level. There was more pressure on silver prices, too (I explained why yesterday in my editorial, Why Silver Prices Are Falling So Quickly).

So, what are we to make of this and what action should investors take?

In times of volatile markets, I go back to the basics: No investment or commodity rises straight up during a bull market or falls straight down during a bear market.

Aside from its dip during the Great Recession of 2008/2009, crude oil has been in bull market since September of 2001. Common sense dictates: in the U.S., there are approximately 80 cars for every 100 people. In the world’s fastest growing economy, China, there are only 13 cars for every 100 people.

Oil is limited in supply. Electric and solar cars have not been successful. Oil is not only used for powering our vehicles and heating our homes, but also can be found as an ingredient in many of the items we use daily, including plastics, paint, synthetic fibers, make-up, and even medicine.

The law of economics says that when you have limited supply (as we do with oil) and increasing demand (from evolving countries like China and India), prices will rise in the long term. About 60% of the U.S.’s oil needs are satisfied by foreign countries, the top four being Canada, Mexico, Saudi Arabia, and Venezuela. Only 10 years ago, the U.S. was the main oil customer of these countries. Today, the U.S. competes with China for oil from these four countries.

Bottom line: demand for oil is rising, not declining. However, supply is limited.

Moving to gold bullion…

The greatest financial story of the past decade has been the quiet bull market in gold bullion. The metal has moved from $300.00 an ounce to $1,500 an ounce in about 10 years’ time. If we look at a 10-year chart of the U.S. dollar against other world currencies and a 10-year chart of the price of gold bullion, there is an almost perfect inverse relationship. The U.S. dollar falls in value, gold rises in price.

If you believe that the Fed will stop printing money, if you believe that the U.S. government will get its budget under control, if you believe that inflation will not be an after-effect of too many dollars in the system, and if you believe that the national debt will not hit $20.0 trillion by 2020, then you…

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