Black and Yellow Gold - August 8

[dan_s]

Crude Oil and Gold are both considered hedges against inflation. Historically, the price of crude oil and yellow gold tend to move in the same direction.

It is just a relationship that is worth keep and eye on.

Note below is from Adam A. Rozencwajg, CFA | Managing Partner Goehring & Rozencwajg

Hi Dan,

Have you noticed the rally in gold prices that has taken place over the last three months? We believe this is just the tip of the iceberg.

Whether you compare the value of gold holdings relative to the amount of money printed by the central banks, the global stock of financial assets, or the price of the Dow Jones Industrial Average, there is no denying that gold is as cheap or nearly as cheap as it was in 1929, 1970, and 1999. Each of these years proved to be excellent times to have significant gold exposure.

There currently exists an array of potential catalysts that could drive the price of gold even higher, including the positioning of commercial traders and speculators, the gold-silver ratio and ongoing central bank actions.
----------------------------------
In their Q2 Natural Resources Market Update this is what they say about crude oil prices:

Escalating trade war rhetoric from the Trump administration, combined with worries over
slowing Chinese growth, cast weakness over global resource markets in Q2. Oil prices were
again volatile. WTI traded as high as $66 per barrel in April before pulling back to a low of
$51 in June amid worries surrounding slowing global oil demand. The International Energy
Agency (IEA) cut its oil demand growth estimates for the first quarter of 2019 to only
310,000b/d y/y and they lowered Q2 growth to 800,000 b/d.

Oil prices did rebound to almost $60 per barrel by the end of June, as OPEC successfully
rolled over its production agreement from last November. Energy-related stocks continued
to underperform the actual commodity. For example, while WTI and Brent prices declined
3% for the quarter, the XOP (the S&P E&P ETF) fell 11%and the OIH (the Oil Services
ETF) fell almost 14%. We have seen a radical underperformance of energy-related equities
versus the oil prices over the past three years. Since bottoming in Q1 of 2016, oil rallied over
125%, while E&P stocks (as measured by the XOP) are up barely 10% and the oil service
stocks are now down almost 30%. The radical underperformance of energy-related equities
has produced tremendous value and we remain bullish on the group.

Although the IEA believes the global oil market is in surplus, we vigorously disagree with
their analysis. Both WTI and Brent oil prices remain extremely backwardated and this
backwardation has not decreased in the last 3 months. If market balances had loosened as
much as portrayed by IEA data since the beginning of 2019, we should have seen both WTI
and Brent markets swing into contango, which has definitely not happened. (For those
unfamiliar with the terms “contango” and “backwardation,” they refer to the position of
future prices versus today’s spot price. A market where the future price is higher than spot
is “contangoed,” indicating that supply is greater than demand and that inventories are
building. A market where the future price is lower than today’s spot price is “backwardated,”
indicating that demand is greater than supply and that inventories are tight.) We remain
bullish on oil prices and believe the second half of the year will see significant strength.
Please refer to the “Oil Section” of this letter where we will discuss market balances, the
“missing barrels,” Q1 demand disruptions, and the outlook for both the US shales and
non-OPEC/non-US oil supply. Contrary to consensus opinion, the oil market today is very
tight and we believe it will continue to tighten as 2019 unfolds.

Natural gas prices were very weak in Q2. Henry Hub prices fell by 13%.The reason for the
pronounced weakness was simple: supply continued to surge. The latest IEA data suggests
that US natural gas supply continues to grow at near record rates. According to the last
published data for May, US dry gas supply is growing at almost 9 bcf /day, or by almost 10%
year-over-year. Surging production from the Delaware side of the Permian Basin remains
the strongest source of production growth. LNG exports continue to surge and should grow
by 6 bcf this year. However, LNG export capacity growth will slow significantly in 2020.
Without any slowdown in supply or further drops in the natural gas rig count, the natural
gas market will remain in structural surplus. Please see the natural gas section where we
discuss the problems facing the US natural gas market.