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Gold and Oil are the New Mecca

Group-think can go a long way.  Even though the S&P 500 had a rather uneventful day and the VIX came well off of its highs to close at 28.8, there were other rather eventful market runs that I think are nearing their end.  Gold hit a high of $1,084.4 an ounce today under renewed speculation that the dollar is nearing an epic collapse.  It seems as if I cannot get 10 minutes through any day without hearing or reading that gold will be my salvation in the coming apocalypse.

Gold and Oil skyrocket intraday as the Dollar loses ground

Gold and Oil skyrocket intraday as the Dollar loses ground

Gold is a store of wealth and I will not knock that very valuable intrinsic quality.  My faith is only in a currency that is backed by a hard asset such as gold, but alas there are none.  My next best choice is a currency that is backed by a country that has a strong balance sheet, a robust/diverse economy and a government that acts with sound discipline.  The dollar fails at least two of those criteria.  Therefore, unless things shift mightily I have a negative long-term view on the dollar’s purchasing power and will adjust my investments accordingly.

That being said, the destruction of a currency does not happen overnight just as a stock market does not proceed to zero in a month’s time.  There are many corrections and reversals along the way (volatility) with an equal number of dooms-dayers and green-shooters to annoy the most vehement bull or bear.  I will not speculate on the peak price of gold during this current bull run, but I do want to speculate on the other commodities that are chasing it to the moon on the premise of a dollar collapse.

We are well within a season that typically shows falling demand in gasoline and oil. Crude oil is spiking to $80 per barrel even though inventories are rebounding during a low demand season amid a very weak economy with 10% unemployment.

Inventories have rebounded to 340 million barrels

Inventories have rebounded to 340 million barrels

It is my belief that oil will remain around current levels or pull back for a mild correction as weakening demand and increasing supply weigh in on the price rather than the current fixation on a plummeting dollar.  Many investors have been buying out of the money calls on gold and oil to capitalize on the coming collapse of the dollar.  Selling out of the money December or January calls on USO or UGA  looks attractive while the others hope and wait for an apocalypse.

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Continuing the Discussion

  1. The Relative Strength of Countries – SurlyTrader linked to this post on November 5, 2009

    […] If we believe that a currency crisis is not at hand, then certain trades may make sense given the economic conditions.  Interest rates will not stay at their relatively low level.  That is why I recommended selling call options on TLT. Commodities (not just gold) diversify an investment portfolio and add protection against inflation over time. I do not expect inflation to kick in during the near term with 10% unemployment and tight consumer credit. As a short-term play for an anti-crisis view of the dollar, look at selling call options on oil or gasoline as the slow winter demand will tug on the fear drive… […]



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