COMMODITIES NOW
many a pretty penny, particularly during the financial crisis that unfolded in 2008, but by now the evolution of the dynamics behind the market was almost complete. This leads us into the soaring
fourth movement of the symphony. As markets regained their footing in 2009, renewed investment interest, combined with a growing global market demand for commodities as weather disrupted production
... crude oil gained about 650% to gold’s 255% before the economic collapse that would weaken them both
of almost everything agricultural, allowed many markets to break free of previous bounds, raging higher and further than ever before thought possible. The downside is that with this growth and expansion, the inevitable disconnect between futures and the underlying cash markets occurred, a crack that could at some point prove dangerous to the expansion of this new world of markets.
Part II: Crude Oil vs. Gold – Long Live the King Commodities have been traded
since biblical times. Recall that Joseph, many years after the coloured coat and well incident with his brothers, was buying and selling
Figure 2: Crude Oil Continuous Monthly
wheat for the Pharaoh. Just as important, gold has been a safe haven since possibly before societies were born. As mentioned above though, as the 21st
century began to roll there came a
challenger to the crown. The crude oil futures market had a pretty quiet history dating
back to its origins in the early 1980s. Most of its time was spent bobbing between US$10 and US$30 per barrel, save for a blip into the US$40s in the early 1990s at the onset of the First Gulf War. As a side note: this brings up a couple of interesting points; one; remember when US$40 seemed high for a barrel of crude, and two; that rally in August 1990 would set the stage for the longer, more dramatic move early in the next decade. Heading into the new decade, crude oil was recognized as
a nice little market, but lacking the psychological stability of gold to ever be viewed as a safe haven market. That status was reserved for gold, and in some cases the US dollar index. In times of inflation or war, money would sail into the safe harbour of gold. In times of deflation and relative peace, the US dollar would be finding friends. But all that changed the morning of September 11th
, 2001. Dating back to the First Gulf War, tensions in the Middle East
had been mounting, creating more and more price spikes in the crude oil market as emotions ebbed and flowed causing global supply fears to increase or decrease. In the aftermath of 9/11, like most markets, crude oil fell, posting a low of US$19.44 in November 2001. At the same time, true to its nature in times of trouble, COMEX gold had rallied from an August 2001 low of US$265.90 per ounce to a November high of US$281 – even as the dollar soared. Then, crude oil took off, rallying from its low monthly close in
November 2001 to a high monthly close of US$142.65 in June 2008, followed by a high trade of US$147.27 in July 2008. Over that same time, COMEX gold had rallied to a high of just over US$1,000 in March 2008. While both were impressive moves, note that crude oil gained about 650% to gold’s 255% before the economic collapse that would weaken them both. Granted, price change alone does not designate a market sector
leader, for if it did, the mercurial pork belly market (when it was in existence) could have argued for its place on the throne. More important is total open interest. From the start of the new millennium (January 2001), open interest in crude had increased about 330% from 408,000 contracts to about 1,344,000 contracts. On the other hand, total open interest in COMEX gold had jumped 420% to about 480,000 contracts. By sheer volume, more money seemed to be pouring into crude oil as an investment opportunity, but again, was that enough to displace gold as the true hedge against inflationary concerns? Since January 2001, crude oil has a negative
Source: DTN Prophet X 6 December 2010
correlation with the US dollar index of about 81%. On the other hand, over that same timeframe gold’s negative correlation to the greenback is about 74%. Looking at the situation through this lens, it would seem to confirm the idea that crude oil has supplanted gold as not only the investment market of choice, but also as the new hedge against
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