Tags: Gold | Bug | Price | Oil

Gold Bugs See Bad Omen in Widening Price Disparity with Oil

Wednesday, 29 October 2014 06:08 PM

Add the bear market for oil prices to the list of reasons that U.S. inflation is still tame and why some investors see bigger losses in gold.

The U.S. crude benchmark fell to a two-year low this week, signaling lower costs for American companies and making it less likely investors will look for inflation hedges, such as gold. Oil’s slump pushed the ratio between the two assets to near a 17-month high, a sign that bullion is relatively expensive, said John Stephenson, chief executive officer at Stephenson & Co. Capital Management in Toronto.

Federal Reserve policy makers said after concluding a two-day meeting Wednesday that lower energy prices will hold down inflation in the near term. The central bank ended its bond-purchase program, further reducing the appeal of bullion as a hedge.

“People don’t think inflation will become an issue in the near future,” said Stephenson, who helps manage about C$45million ($40 million), including investments in commodities. “There are no fears of a crisis, so investors are not rushing to gold.”

One ounce of gold bought about 15.47 barrels of oil on Oct. 22, the most since May 2013. That’s up from an average of 12.52 since 2000 and 11.92 reached in June, which was the lowest since July 2013. The ratio was near 14.8 today.

Money Supply

Gold climbed 70 percent from December 2008 to June 2011 as the U.S. central bank bought debt and held borrowing costs near zero percent in a bid to shore up growth. Prices slumped 28 percent last year partly because the inflation investors were concerned about after the increase in money supply failed to materialize.

U.S. prices as measured by the Fed’s preferred gauge, the personal consumption expenditures price index, rose 1.5 percent in August from a year earlier. The index has remained below the Fed’s 2 percent target for more than two years.

Oil collapsed into a bear market this month on concern rising global supplies will be more than enough to meet slowing demand. West Texas Intermediate futures in New York fell 11 percent this month through Tuesday to $81.42 a barrel. Gold rose 1.5 percent to $1,229.40 an ounce in the same period.

“There are no fears of global inflation at the moment and in case inflation rises in the U.S., the Fed will raise rates and that cannot be good for gold,” Rob Haworth, a senior investment strategist in Seattle at U.S. Bank Wealth Management which oversees about $120 billion, said. “I am bearish on gold.”

On Wednesday, crude ended up 78 cents, or 1%, at $82.20 a barrel on the New York Mercantile Exchange. Gold fell 0.4 percent to settle at $1,224.90 on the Comex, but dropped to $1,211.68 an ounce in later trading that reflected investors' reaction to the Fed's statement.

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Add the bear market for oil prices to the list of reasons that U.S. inflation is still tame and why some investors see bigger losses in gold.
Gold, Bug, Price, Oil
Wednesday, 29 October 2014 06:08 PM
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