WEST TEXAS TWO STEP—GOLD REMAINS THE WALLFLOWER

5/20/13

Today’s (i.e., Monday, 5/20/13’s, page C1) Wall Street Journal made much of the disparity of the performance of gold and West Texas Intermediate (“WTI”) crude oil.  By my calculations, as I write this, WTI is up 5.5% year to date while gold is down 17.5% and silver is down 12.2%.   As the Journal points out,

Skeptics say this mismatch may be a sign of trouble.

As one reads the article, one gleans that the experts must mean trouble for crude oil, as opposed to wider trouble for the markets, the economy, or Western civilization, which yours truly is always anticipating, but I digress.   People who follow these things point out that there is a mismatch between physical demand and investment demand for oil.  The former is still reflective of a sluggish economy, along with abundant supplies, while the former is being fueled by a thirst for, as the Journal puts it

higher returns than those shackled to rock-bottom interest rates.

The Journal may be right; who knows what goes on with various trading programs that react to what used to be considered miniscule moves of seemingly largely unrelated markets against each other?  

However…

The “out of bonds into crude oil futures” explanation doesn’t make much sense to old guys, like yours truly, who still embrace economic and financial fundamentals and have been trading long enough to know how perilous trading normally is. 

Two days ago (GOLD AND BONDS:   STRANGE BEDFELLOWS IN A YIELDLESS WORLD?, 5/18/13), I expostulated on my theory that the key to gold’s recent demise is not return but yield; i.e., gold may be getting hammered as part of wholesale desertion of low and no yield assets in favor of big dividend paying stocks, the risks of which are being downplayed or ignored.  If that theory is true, either gold has to trade up or crude oil has to trade down.   (Note that gold is up a little over 2% today and silver is up slightly more, but one day means nothing, at least to investors.) Investors can’t be fleeing no yield gold or low yield bonds in order to invest in no yield crude oil.  And it seems that if investors, or traders, more properly, are abandoning gold because it has no yield, they would also be abandoning crude oil.  Instead, they are bidding up crude oil, though 5.5% YTD only looks like a whopper return relative to the dismal performance of precious metals.

Again, I’ll leave the trading like a scalded dog to my younger and presumably wiser colleagues.  But it’s fun, and sometimes informative, to speculate on why commodities or markets are doing what they’re doing.   However, the only thing we can say for sure about crude oil is that there are big buyers, or a lot of little buyers, who like it for reasons we don’t know and can’t know.   We might also say, with only slightly less assurance, that any speculation as to their reasons is just that…speculation…and there is probably more going on than we know.