Gold is needed. What its opponents (Western central bankers, politicians and economists who appreciate too much the flexibility of paper money) say that gold no longer has any industrial utility is false. Gold is not only a cultural heritage of the Neolithic, it is not only an aesthetically attractive mineral for all men and animals who cannot resist the charm of that which glitters and it is not a store of value only for small sects of nostalgics of the Gold Standard.
Gold is popular in all emerging countries. It pleases the Russian and Chinese elites, who occasionally dream of making it the basis of their currencies to prepare for the day when they will supplant the dollar. Malaysian peasants, the Indian petty bourgeoisie and tens of millions of Chinese like it, who in just a few years have become the biggest buyers of jewelery and bullion in the whole world. The Saudi monarchy likes it, which asked Zaha Hadid to cover the ceiling of the King Abdullah station of the new sci-fi Riyadh subway with gold.
But in addition to being a pleasure, gold is used in electronics and to produce catalytic converters and has a bright future in nanotechnology. And the successor to the Hubble Space Telescope, the James Webb Space Telescope which will study the history of our universe from 2018, will be largely coated in gold.
There is no need to remember that oil is needed. For seventy years, attempts have been made to undermine it (nuclear, plutonium, fusion, wind, solar, biomass) but in the end, only a superficial scratch is made and one invariably returns to this source which is so practical, abundant, versatile and economical. And where there's oil, there's usually natural gas as well, as a kind of added bonus.
All the more they should be used, gold and oil, in the phases in which the global economy is expanding. Oil to meet the growth in demand typical of recovery phases and gold to protect against the inflation that usually accompanies the second phase of the cycle.
And instead, just as Wall Street hits an all-time high and while bonds remain very strong, oil and gold slip dramatically and return to the levels of autumn 2010, when the expansion was only one year old of life. In a world where almost everything is expensive or at highs, oil at $77 and gold at $1140 are a great temptation. Not to mention the shares of gold and oil companies, some of which, in the past month, have even halved in value. But does it make sense to let yourself be tempted or is it just a trap? Let's look at the previous expansionary cycles, that of the 20s and that of the 1996s. In the first case, gold and oil remained stable and strong in the first half of the decade and then, as the economy continued to grow, they fell almost by half. Crude hovered at $10 through late 1999 and then sadly hit $400 in 1996, just as stock markets were beginning to indulge in the euphoria of limitless growth based on new technologies. Gold, for its part, remained at $250 until 1999 and sank to $XNUMX in XNUMX (many European central banks sold right at the lows).
The 250s went differently. In fact, gold and oil went up continuously. The first went from 2001 dollars in 1000 to 2008 at the beginning of 15, the second from 2001 in 145 to 2008 reached in the summer of XNUMX, shortly before the catastrophe.
The difference between the two cycles is evident. The former is the rule, the latter the exception. In fact, raw materials normally follow a different cycle from that of the stock exchanges. Equities reach their highs at the end of the cycle (timely demonstrating that they have no ability to predict the imminent economic crash), while raw materials reach it in the middle of the cycle. The reason is simple. Mining and oil companies, before starting new investments, wait for the economic cycle to confirm its strength. Typically, therefore, they don't move in the first year of a recovery, but in the third. Investments started in the third year begin to pay off in the fifth and sixth years. At that point the demand continues to grow, sure, but the supply grows even more and drives prices down.
The cycle of the XNUMXs went differently due to a new subject, China, which in those very years had begun to grow at high rates and devour raw materials, almost indifferent to their price.
Not in every decade, however, there is a new China to accommodate and therefore, in our 2011s, everything suggests that the cycle of raw materials is returning to normal. Since we are in the sixth year of the recovery, a large amount of new production, the result of investments initiated by mining companies between 2012 and XNUMX, begins to enter the circulation and depress prices.
If China had been a surprise on the demand side in the last decade, in our decade the surprise is on the supply side. The massive entry into production of unconventional oil and gas in the United States is unprecedented in its scale and alters the traditional price cycle, accentuating it.
Since so far none of the big producers has announced production cuts (with low prices the temptation is rather to extract more), the imbalance between supply and demand will probably produce even lower or at least not higher prices in the coming months. A nuclear deal with Iran, possible soon, could end sanctions and bring more crude onto the market. The new Republican-majority American Congress will then give the green light to new gas and oil pipelines and will liberalize exports, placing more production on the international market.
Crude production will therefore be cut only marginally, where it costs more (in the deep waters off Brazil or the Gulf of Guinea) or where it is more exposed to competition from new American production (Nigerian light). Since Russia and Venezuela will continue to produce as much as they can, the game will ultimately be played out between the Saudis (who have the economic strength to afford production cuts) and the new US producers of shale oil, more elastic with respect to prices as they are private. It will still take months before a new balance is found.
Gold, for its part, has followed a particular dynamic in this cycle. The traditional strength of the early cycle was accentuated by the idea that quantitative easing would generate inflation. When it was ascertained, from mid-2011 onwards, that inflation did not arrive, the descent began, which has now completed three years of life.
What to do then? On gold and oil, it seems late to sell and early to buy. However, for those wishing to be tempted, we would like to remind you that ETFs on physical crude oil will most likely have to discount the contango on the forward curve in the coming months. In fact, crude oil is so abundant right now that it costs less for immediate delivery than for future delivery. Holding physical crude, therefore, entails a negative carry. Simply put, it costs. On the contrary, buying oil shares (choosing the best ones, in America there are excellently managed ones) allows for the collection of a good dividend.
To those who already have companies in the sector in their portfolio, we suggest not to average and to take advantage of the high volatility to lower the entry price. Another very cold winter is predicted and the prices will be able to make extensive use of gold The new Webb Space Telescope, which in 2018 will replace Hubble.5 temporarily go up again (in particular those of gas). It will be better to take advantage of it.
Even on gold, although we are convinced that it will have a long life as an investment class, we see no urgency to buy it except as a medium-term policy against inflation, which in any case does not seem around the corner. Maximum caution on the high-yield bonds of some American shale gas companies. For the most indebted ones, we will soon see the first bond defaults of this cycle. No problem for the more solid companies.
