Gold News

Gold Jilts Oil

Might you miss the biggest stories by watching gold too closely...?

So the TWO BIGGEST members of the former Communist/Red/Central Planning club yesterday finalized a deal yesterday to send 300,000 barrels a day of Russian oil to the Chinese city of Daqing for the next twenty years, writes Dan Denning in his Daily Reckoning Australia.

It's a $26 billion loan-for-oil agreement that comes with an actual oil pipeline between eastern Siberia and north-east China. So why wasn't this story front page news? Because gold is making new highs and oil is not, that's why.

Oil is a jilted commodity at the moment. Traders remember what it did to them in 2008 after the bubble popped. But if you're a contrarian, you want to pay attention to the stories that are not making headlines. Hence, oil.

But like everyone else trying to get ahead of the game, we'd rather focus on gold. Late last night, wide awake from the jet lag, we puzzled over whether now is the right time to Buy Gold in Australia (and whether coins and/or bullion and/or shares). The strong Australian Dollar mentioned yesterday has capped gold's rise when denominated in Aussies. And should 2008 repeat itself in some way, the USD would rally against the Aussie...and the Aussie Gold Price should approach its high of just over A$1,500.

But will that happen? It's a known unknown. If you haven't sorted out whether gold shares or Gold Coins or Gold Bullion should be part of your investment strategy, you still have time to think about it and do something, if that's what you decide. One reason you have time is that one of the strength's of gold's current move is that central banks are buying it instead of selling it.

This was something we mentioned in our remarks at the Gold Standard Institute show last year; the remonetization of gold in the world's financial system. In fact, in January of 2009 we wrote the following:

"It's not rash speculation to suggest that central banks will prefer to hold on to their gold this year – rather like the increasing (if small) number of private individuals – instead of selling it. As competitive currency devaluations sweep the globe in an all-out effort to fight asset deflation and recession, we think gold will become much more desirable as a reserve asset worth owning, not selling for cash."

Fast forward to Sept. 2010, and "European Central Banks Halt Gold Sales," reports the Financial Times. The article referred to the European Central Gold Bank Agreement (the same agreement we discussed in 2009). That agreement was designed to control the amount of gold being sold onto the market by European central banks. The ceiling for annual sales between September of 2009 and September of 2010 was 400 tonnes of gold.

Last year's agreement expired last week. But Europe's central banks sold only 6.2 tonnes of their gold. Sales fell by 92% from last year. Banks know what real money is. And they're not selling their gold anymore. They're buying it.

Maybe central bankers are Buying Gold because their respective finance ministers are actively trashing local cash. "We're in the midst of an international currency war, a general weakening of currency," says Brazil's Finance Minister Guido Mantega. Exporting nations are trying to boost competitiveness by keeping their currencies cheap and the price of their exports low.

It's a strange old world when you improve your economic strength by weakening your currency. Japan and other Asian exporters (dependant on credit-financed consumption in North America) have been doing it for years. But maybe not everyone got the memo from the stock market in 2008 than the global credit bubble has popped.

You have to wonder if the strong Aussie Dollar will hurt the competitiveness of Aussie exporters. It will probably hurt some a lot more than others. By "others" we mean commodity exporters. For now, any rebound in global mining investment has not led to a huge new production increases in the key commodities produced by Australia (iron ore and coal). The strong Dollar isn't hurting a bit.

But Chris Richardson from Access Economics warns us not to take the high terms of trade and commodity boom for granted. "Australia's fiscal finances, both short and long term, are hostage to the fate of commodity prices, and hence to China's strength,'" he recently wrote. He added that Australia's Federal budget depends on high commodity prices to end the deficit.

"The return to surplus trumpeted in the official forecasts is a pure punt that China and India will keep growing faster than the world's miners will keep digging deeper," Richardson says. "The budget used to be stodgy and boring and responding to a whole range of economic indicators. Now its health or otherwise is very narrowly based on coal or iron ore prices, and that's a very fickle thing to rely on for fiscal health."

Yes it is.

Get the safest gold at the lowest prices at BullionVault now...

Best-selling author of The Bull Hunter (Wiley & Sons) and formerly analyzing equities and publishing investment ideas from Baltimore, Paris, London and then Melbourne, Dan Denning is now co-author of The Bill Bonner Letter from Bonner & Partners.

See our full archive of Dan Denning articles

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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