Oil, Gold and Bitcoin

The falling price of oil did not garner any mainstream financial media attention until today, when U.S. market participants woke up to see oil (both WTI and Brent) down nearly $2.  WTI briefly dropped below $43.   The falling price of oil reflects both supply and demand dynamics.  Demand at the margin is declining, reflecting a contraction in global economic activity which, I believe the data shows, is accelerating.   Supply, on the other hand, is rising quickly as U.S. oil producers – specifically distressed shale oil companies – crank out supply in order to generate the cash flow required to service the massive energy sector debt load.

I am quite surprised by the rapid fall of oil (WTI basis) from the $50 level, because I concluded earlier this year that the Fed was attempting to “pin” the price of oil to $50:

The graph above is a 5-yr weekly of the WTI continuous futures contract.  Oil bottomed out in early 2016 and had been trending laterally between the mid-$40’s and $55.  I read an analysis in early 2016 that concluded that junk-rated shale oil companies would implode if oil remained in the low $40’s or lower for an extended period of time.  Note that some of the TBTF banks who underwrote shale junk debt were stuck with unsyndicated senior bank debt (i.e. they were unable to find enough investors to relieve the banks of this financial nuclear waste).  Thus, the Fed has been working to keep the price of oil levitating in the high $40’s/low $50’s, in part, to prevent financial damage to the big banks who have big exposure to shale oil debt.

The problem for the Fed is that it can’t control the global supply of oil.  There’s too many players.  With oil pinned in that trading range, U.S. oil companies have been pumping out oil as quickly as possible.  The oil drilling rig count has risen for 22 weeks – Oilpro.com – the longest consecutive streak since 1987.  Rising production from the U.S. and elsewhere is keeping global stockpiles high, especially relative to demand.  As a result, you get chart of the price of oil that looks like the one above.  Oil is now well below both the 50/200 dma plus the RSI and MACD are pointing  straight south, indicating a high probability of lower prices for awhile.  Also, note the rising volume in conjunction with the falling price.  This is indicates that market participants have been and continues to be better sellers.

The Fed is thus unable to pin the price of oil to $50 on a sustainable basis.  Why? Because it has no control over the global supply and demand, which prevents control the price of oil for any meaningful period of time (just ask OPEC about that).  Similar to the Fed’s price-management of oil, the Fed has been keeping gold pinned under $1300 since early November in an effort to prevent a rising price of gold from undermining the dollar’s reserves status and signalling the escalating economic and financial distress in the U.S. This is despite rising demand for physical gold coming from numerous eastern hemisphere countries.  As long as the Fed (and western Central Banks) can continue delivering physical gold into the massive demand vortex in the eastern hemisphere, it can somewhat successfully manage the price.

Also similar to oil, the Fed has no control over the supply and demand of gold, except to the extent that the Fed/western Central Banks are still holding gold that can be leased out or custodial gold that can be hypothecated for the purpose of enabling a continuous flow of physically deliverable to gold the east.   But the difference between oil and gold is that the supply of mined gold is relatively fixed (and has been over a long period of time).  At some point the western Central Banks will run out of access to enough gold that can be delivered to buyers who paid to settle their purchases upfront.  At that point, the chart of the price of gold will look like the recent graph of Bitcoin, Ethereum, etc.

This brings up a quick point about the cryptocurrencies.   When the U.S. blocked Iran’s access to the SWIFT trade settlement system, India began to pay for the oil it imports from Iran with gold.  These were very large-dollar transactions. We have yet to hear any reports of sovereign nations using Bitcoin or other cryptos for payment to settle trade agreements. For me, this highlights yet another difference between the use of gold as a currency vs the cryptos.  I want to make it clear that I’m not in the anti-cryptocurrency camp, but I do believe that, ultimately, precious metals (gold and silver) are much more functional as a form of money than the cryptos.   Bitcoin debuted for peer-to-peer transactions in 2009. Gold has functioned for this purpose for over 5,000 years.  My preference in this situation is to bet big on the form of money that has pedigree.

8 thoughts on “Oil, Gold and Bitcoin

  1. Great article. It will be a sad day in America when the manipulation ends. A lot of people will find themselves on the wrong side of history. Sigh…Darwinism at work.

    What do you think of the emerging gold backed cryptos? One new crypto is onegram.org which claims to be Sharia complaint. Gold backed cryptos seem to function a lot like modern gold trade notes. I see a lot of value in merging gold and crypto technology. Gold backed cryptos could enable gold to play a greater role in daily transactions and a larger role in the modern world. Counter party risk is certainly a concern, but people put their money in banks and 401ks…what about the counter party risk in those institutions?

    1. I have not studied the custodial and independent audit arrangements of the gold-backed cryptos. If they proliferate I’ll take close look.

    2. Hi Peter,

      Gold backed currencies work very well indeed (sarc) that is why we have exactly 0 of them today even though the whole world had them as little as 125 years ago.

      That this crypto has Sharia law backing does not mean anything. If anything it means that they are on board with what the Catholic Church did centuries ago. Even though the holy Bible disallows usury (interest) they threw it overboard centruries ago.

      Human nature shows that currencies will be used to borrow against, hypothecate it, rehypothicate them, develop futures and then some ubtill it all blows up. Besides that, our ”money concept” is corrupted. At least since we have global reserve currencies V2.0 (meaning after the dark ages in Europe). In Roman times it was also corrupted.

      As far as I know, the most stable currency system was back in the middle ages when fairs where the main exchanges of goods and services in wider areas. How they worked (ofcourse Iam super generalising).

      Everyone that came to fair did that to exchange their surplus goods to exchange them for surplus goods from other producers they lacked. To ease the exchanges the fair organisers issued script (now called fiat) but when the fair ended, the script was cancelled. The trade differences between traders were settled in gold and to a lesser degree in silver. The price of gold in that script was not fixed but also marked to market in that temporary market place.

      The British used that system in an adjusted version within their empire. That is why the British Souvereign gold coin has no price or value stamped on it.

      The ”eastern mind” still applies this concept. Fiat is for trading, gold is for saving. That is why the Chinese people are buying hand over fist even though the communist regime outlawed gold way longer then it was the case in America.

      Fiat money brought down many dynasties in China. They invented it way before America even existed. Before they invented it, copper was the main currency in China. After they discovered much, much copper they ofcourse suffered massive inflation so traders, merchants and so on had to haul a lot of copper. That was ofcourse very uneconomical. (btw, copper was freely exchangable into gold and silver wich was their store of value).

      Then came the invention of paper money. In the beginning it was a huge succes and ended in decadance, waste, then tyranny and then collapse and the dethroning of yet another dynasty.

      It is ironic, when Marco Polo (1254-1324) came back after his exploration of China / silk road that lasted 24 years, he brought back fiat that dynasty issued and explained how great it worked. Instead of loving the idea, the ones in power in Europe who saw it eventually burned it. Now its totally the opposite. The east fully embraces the following concept. Currency is for spending, gold is for saving. To think that someone and ofcourse companies and state debt is as good as gold is silly to say the least. That is why our money concept is corrupt.

      I know I was paining history with a mega huge super brush (smile), I hope to have given you some food for thought.

      Regards,
      Hugo

  2. So because Banks have toxic oil related loans in their portfolio, the Fed has to prop up oil prices. And customers pay a high price at the pump to subsidize this stupidity. Sounds very just. Why help only the stupid Banks, how about the Federal reserve send out monthly checks to each family to subsidize their exorbitant housing costs and gasoline bill? And how about a monthly check to cover the interest stolen from savers to again help the stupid Banks?

    1. “So because Banks have toxic oil related loans in their portfolio, the Fed has to prop up oil prices. And customers pay a high price at the pump to subsidize this stupidity.”

      The overall problem is resulting in prices at the pump being LOW. If lower, the banks who have this toxic debt, plus the oil companies that keep society functioning [everything stops without energy] collapse, triggering economic collapse of society.

    1. I don’t think the Indian people, with the exception of a tiny minority of momentum chasing gambling junkies, can or will participate in bitcoin. At least I hope that most Indians, given their historical affinity for gold and the recent fiasco involving the removal of their highest denomination banknotes, with get suckered into cryptos.

      But I do agree that if TPTB are in favour of something, then I (contrarian that I am) am against it.

  3. I don’t think the Indian people, with the exception of a tiny minority of momentum chasing gambling junkies, can or will participate in bitcoin. At least I hope that most Indians, given their historical affinity for gold and the recent fiasco involving the removal of their highest denomination banknotes, will not get suckered into cryptos.

    But I do agree that if TPTB are in favour of something, then I (contrarian that I am) am against it.

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