Forget Fed When It Comes to Gold, Oil

 | Apr 04, 2012 | 12:23 PM EDT
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Is this the big break in oil? Was the oil rise really all about the Fed printing money and now that the Fed might be stopping the presses you should sell it?

Is this the big break in gold and now that the fed's gotten all sober, we should sell gold?

That's the impression I got from the Street as Brent and West Texas get dinged for a couple of bucks.

That's the impression I got with gold down $50.

Let me kindly take the other part of the trade.

First, neither gold nor oil has really correlated with the Fed policy over any intermediate timeframe. Any attempt to shoehorn these commodities to an individual Bernanke speech or Fed notes has not held up under any scrutiny. I like rigor. You try to predict gold and oil by looking at the dollar and Bernanke, you are not going to make money for even a few weeks' time. Sure, you can be right for a couple of days. But history says that will lead you astray.

So what are gold and oil levered to? Supply and demand. First, take gold. Have you noticed how poorly-performing the gold stocks have been? Do you think that's because of the price of gold going down? Nah, the declines of the stocks are much worse. Gold, year over year, has gone to $157 from $139, about an 8% return.

How have the stocks done? Goldcorp (GG), the best of the lot, is down 14% year over year. Newmont's (NEM) down 9%, Barrick's (ABX) down 17%. Agnico Eagle's (AEM) off a staggering 48%. That's because, despite the escalating price, it can't find enough to capitalize on it and what it can find is more expensive to mine. At the same time, the emerging markets want more, not less, gold. India's restricting gold buying and in many ways that's the most important reason for gold's weakness. I want to buy gold into this weakness to make sure it's a bigger part of a diversified portfolio.

Oil? Sure, the Saudis are pumping more. Sure our cars are using less. Sure we are finding more here. But the rising use of oil around the globe is relentless and even during the Great Recession there wasn't much of a decline in usage. Meanwhile, again we are not discovering vast new fields that are accessible without huge costs and the Chinese have an insatiable thirst for oil.

That trumps any Fed linkage.

Am I saying that oil and gold are done going down? It's always a fool's errand to pick a short-term bottom. Am I saying I like these commodities and want to be a buyer not a seller?

Yes.  No caveats. Just yes.

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