The oil bulls started the month with such high hopes, but it all come tumbling' down. Well it all comes tumbling' down. Yes, it all comes tumbling' down whenever you're credit isn’t sound.Austerity is a nice word and one the market wants to hear but there are doubts about whether or not that can happen. Not just in the European Union but in the good old United States as well. Oh sure an austerity plan put through by Portugal was welcome by the markets and seemed to calm the recent debt fears stormy seas, yet at the same time moves in the commodities markets are showing that they fear another round of economic anguish.
You see austerity is great, but for the euro zone, it is like removing economic stimulus or even like raising interest rates. Higher taxes and less government spending will slow down the EU’s growth and its demand for oil increasing the spectra of a deflationary down turn.That’s right, deflation. These fears are being clearly stated in the “decoupling” in the gold and oil market. As gold soared to record highs in dollar terms, crude oil has sunk ever lower. Yes it is in part because the dollar looks to be a better bet than the Euro in the short run or that the markets realize that perhaps the mystic of the Euro was a fantasy all along. Have you heard of any oil producers lately calling for oil to be priced in euros? How about any super models wanting to be paid in fiber?
What is being stripped away in oil and other commodities is the extent to which the price we see on the screen is artificially stimulated by a pile of economic puffery that when the true magnitude of debt is unmasked, the amount of economic growth it will take to bay it back is staggering. The inflation that we are seeing is being promoted willfully by central banks but as we continue to unmask the debt demons we see what the rally in gold now is really all about.The rally in gold is not just an inflation hedge but a hedge against a total global economic collapse. People are buying gold because they believe that global governments will dissolve and drown in heaps of mountainous debt that will suck growth down in a hole for decades and demand for commodities and everything else.
Sure when governments print money that is indeed the definition of inflation but by trying to get us to worry about inflation is to try to not have us worry about the real problems. In other words, inflation would be a nice problem to have.As bearish as I am for oil, it's been possible to do pretty good on the long side too. Long term I still feel that oil will break out to the downside yet for most traders, I think that the swing sizes make it harder for them to ride this out. We have seen a precipitous drop from the false breakout to $87 a barrel on the upside that came on a light volume holiday week and oil should target new lows for the year very shortly.
Still for many to ride the short side, the ups and downs may make that impractical. For them it may be better to try to pick the high range and low range for the day. In these market conditions it is imperative that you have a well defined plan.
You can reach Phil at pflynn@pfgbest.com and make sure to catch him every day on the Fox Business Channel.
The "Super Cycle" in Gold and How It Will Affect Your Pocketbook in 2010
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