Friday, November 19, 2010

Brad Zigler: Is Crude Oil Taking Lessons From Gold?

Commodity prices sold off hard this week as concerns over credit tightening in the Chinese market prompted traders and investors to rethink their inflation notions. Unexpectedly, in October, year over year inflation on the Chinese mainland rose to 4.4 percent, prompting authorities to jawbone a jack up of interest rates and price controls.

Gold prices tumbled from the $1,400/oz level reached after a nearly unabated three month rise. Industrial commodities also took it on the chin, as fears of slowing growth in China percolated.
But the most industrial of commodities is, of course, oil. Oil had rallied in autumn along with gold, albeit with greater volatility, and with punier returns as well. Gold chugged uphill from July's end to a 14.8 percent gain ahead of the November election. Simultaneously, oil pitched and rolled 3.2 percent higher.

The wheels on the commodity undercarriage started wobbling after the votes were tallied and, more importantly, once the Fed laid out the parameters of its second tranche of quantitative easing. Then oil and gold both tumbled. Gold led the way down, just as it had led the way up. Since the top of November, bullion's slumped 1.7 percent, while front month WTI crude prices have slid 1.3 percent.

Recently, oil prices have gyrated nearly twice as much as gold. This autumn, the annualized standard deviation in oil's daily close has been 27.8 percent, while gold's wobbled at a 14.7 percent rate.

But most arresting is the expectations of future volatility reflected in option prices. As gold topped the $1,400 mark, the CBOE Gold Volatility Index (CBOE: GVZ) jumped to 24.65. This index represents the near term variance in the price of the SPDR Gold Shares Trust (NYSE Arca: GLD) here, an annualized 24.65 percent as imputed to option premiums. A week before, when gold was $50 lower, the volatility index registered 21.87......Read the entire article.

The "Super Cycle" in Gold and How It Will Effect Your Pocketbook in 2010


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