Gold And Oil Prices: Armageddon Trade Over?

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A Look At Gold and Oil Prices by Todd Sullivan, ValuePlays

“Davidson” submits:

Gold (SPDR Gold Trust (ETF) (NYSEARCA:GLD)) daily pricing history cannot be understood vs. simple comparison to currencies or other financial indicators. What is most important is what people were thinking at the time, the general fear and/or inflation fear at the moment. You can only do this by tracking the daily media which is my process. I save some 6-10 articles each day covering how people see the world, perceptions of value from distinct individuals such as Buffett and Wilbur Ross who are Value Investors to Soros, Klarman, Tepper and Asness who are in fact Momentum Investors with differing time perspectives. Gold peaks during periods of highest inflation fear and ebbs when fear subsides—That is the true connection!

Gold at the moment is losing interest as the “Armageddon Trade” based on fears that Fed actions would create hyperinflation. It did not primarily because government made the money available but did not spend the bulk of it. Obama fortunately did not have any idea what to do. Government spending is at all times inflationary because it carries political agenda and not profit motive. There is nor ‘rate of return’ measurement in deciding how and what to spend.

As hyperinflation fails to emerge, my guess is that gold will fall below $1,200 and perhaps drop down as low as $600-$700oz range. Just a pure guess. What we are seeing currently is the reversal of hyperinflation fear especially as oil falls and US$ rises. Oil (United States Oil Fund LP (ETF) (NYSEARCA:USO)) falling-US$ rising is what identifies this as hyperinflation trade reversal.

Some are taking commodity price slippage as a sign of deflation. It is not so!! The US$ is producing more oil, but it remains a net importer. We may for a time become an exporter in the next 10yrs, but with oil falling in price its use tends to expand globally as the best and cheapest source of fuel and we should see oil prices remain stable above the marginal cost of production of $85bbl. Oil going sideways will drive gold down and cause investors to see equity (SPDR S&P 500 ETF Trust (NYSEARCA:SPY)) earnings as more attractive.

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About the Author

Todd Sullivan is a Massachusetts-based value investor and a General Partner in Rand Strategic Partners. He looks for investments he believes are selling for a discount to their intrinsic value given their current situation and future prospects. He holds them until that value is realized or the fundamentals change in a way that no longer support his thesis. His blog features his various ideas and commentary and he updates readers on their progress in a timely fashion. His commentary has been seen in the online versions of the Wall St. Journal, New York Times, CNN Money, Business Week, Crain’s NY, Kiplingers and other publications. He has also appeared on Fox Business News & Fox News and is a contributor. His commentary on Starbucks during 2008 was recently quoted by its Founder Howard Schultz in his recent book “Onward”. In 2011 he was asked to present an investment idea at Bill Ackman’s “Harbor Investment Conference”.

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