Gold News

Demand vs. Speculation

What's really driving oil, food and Gold Prices higher – commodity demand or money supply...?

YOU CAN'T go to bed these days without waking up to higher prices for everything, writes Dan Denning for The Daily Reckoning in Melbourne, Australia...

   Crude futures in New York hit $130 overnight, and now everyone is wondering what’s next – $150...$200...?

Our friend Kevin Kerr back in the States reckons that the combination of peak North American driving season (the Memorial Day holiday this weekend) and a touch of financial speculation will pressure prices higher. There is no relief in sight, either.

Is it demand? Is it speculation? Is it Opec punishing George Bush for the war in Iraq? The oil cartel thinks there’s plenty of oil. It’s the declining US Dollar that’s to blame for record high Dollar-oil prices. Opec says that for every one percent decline in the Dollar on the currency markets, oil rises by $4 per barrel.

The solution to high oil prices, then, is not increased supply or reduced demand, but a stronger US Dollar. Or so Opec says – and there is certainly some truth to it. But a truly "strong Dollar" policy is not likely from the US Fed or Treasury any time soon. And meanwhile, as a tangible good whose supply cannot be increased by a central banker, the oil price (a little like the Gold Price) tells you there’s too much paper money chasing too little stuff.

The US Dollar is not cooperating to bring oil prices lower. After its recent, much-ballyhooed rally, the Dollar is giving back some of its gains. It's now falling again vs. the Euro, the Yen, and the Pound (the four other ugly contestants in this Global Currency Beauty Pageant...where the winner is the least ugly).

Gold has not been idle either. You’ll notice it appears to have completed its consolidation after the first charge to $1,000 per ounce. After regrouping, shaking out the weak hands, and giving the dollar its due, Gold is on the march again.

   Our friend Kevin was on CBS Marketwatch this morning telling the host that gold could reach $1,300 or $1,500 in "just a few months".

   His original forecast was for a move to $1,500 in twelve months. But the speculative money is moving fast, Kevin says, and that could drive the move more quickly than he expected.

   What the speculators may not know is that they have the fundamentals on their side and not just the technicals. That’s always a good thing in a trade, when you have more than one thing going your way.

   In gold’s case, US Dollar selling is driven by strong technicals. The Dollar is “retracing” its recent rally. Beyond the charts are the facts about the global currency market. The Fed and Bank of England do not look like raising interest rates this year. Australia might and the European Central Bank might.

   With interest rate differentials widening and commodity prices confirming it, it’s not a good time to be long of Sterling or the US Dollar. It is, however, a very good time to produce commodities. Failing that, you might like to buy and hoard them instead.

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

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