Dusting off the crystal ball today I see a few things forming in the mist of the future.
We've seen oil rising in tandem with inflation expectations and the weakening of the dollar even when there is a glut of oil on the market due to the SHELLACKING that consumers pocket books have been taking. Investors have been using oil as an inflation hedge as oil being priced in dollars is the only thing that is providing value to the dollar. This of course confuses many consumers who wonder why oil and gas are priced so high if there's so much of the stuff.
Two critical points to be aware of when considering oil:
1) Academic and former U.S. government adviser Philip Verleger states that crude will drop to $20 a barrel due to deteriorating economic conditions and a vast surplus of oil on the market....source. Typically as the dollar rallies the price of oil will go down. Or as the price of oil goes up the dollar declines. Which is it? That's important to understand but that's for another time. The point here is that hedge fund managers and investors use oil for their inflation speculation and it causes illogical price gains. On a side note, when/if the price of oil does drop people will say, "deflation, deflation". That will not be the case. It will be a supply/demand issue.
2) The CFTC recently announced that they are going to seriously consider placing limits on contract speculation in oil and other energy commodities and silver and gold as well. This is very important to consider. If oil's function as an inflation expectation is diminished the logical recipients of the inflation play will be silver and gold, as it should be. The only reason oil is used as a hedge now is because of its inherent usefulness. The stale old thought of silver and gold being impractical because it doesn't pay interest or dividends and sometimes has storage fees associated with it is soon about to change. This thinking persists though even as silver's uses as a commodity keep rising. Silver, as with oil, is fundamental to our way of life but who knew?
As I just stated, oil speculation may be curbed in the near future and silver and gold will be the beneficiaries of this. But I also just stated that position limits may be placed on silver and gold as well so what gives? Well, this is where reality kicks in, where the rubber meets the road. You see, the hedgies who are using oil as a speculative tool are buying contracts, not the physical oil. The same with silver and gold for the most part. So if investors are limited in their ability to buy oil and silver and gold contracts, why, they must buy the physical instead. But do you think they will go out and fill tankers up with a bunch of oil? JP Morgan might (is) but the typical investor will not. No, their attention will be diverted to the physical silver and gold, equities and ETF's.
Just recently a very interesting thing happened. Greenlight Capital just switched over all their gold holdings in the SPDR ETF to PHYSICAL bullion, 4.2 million shares. Think about that. If the big boys would rather hold physical, do you want to hold paper?
So what's a small fish supposed to do in a very big fish bowl? Well I think the answer is quite obvious, buy some silver. Buy some gold. If you're intersted in the oil play still I would personally recommend the USO fund. It follows the price of oil pretty closely and if oil is indeed going to $20, when it does, you will want to load up on USO. Oil at $20 is a real problem for humanity. I won't get into that too deeply here but suffice it to say that cheap oil is destructive to production and will cause a supply shortage in the future even though there's a surplus now. This WILL happen regardless of whether or not oil goes to $20. I consider $60 oil cheap.
So be very alert. There are many factors that are steering thinking towards silver and gold. This will happen naturally as the markets needs are met but it does appear that there will be some catalysts along the way. We can only speculate as to the motivations and intentions behind these catalysts and we'd probably be wrong but one fact is undeniable. Big money is moving into silver and gold. What will your money do? It's your decision and you will be responsible for action and inaction alike.
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