Gold doesn’t matter, but another falling commodity does…
The stunning plunge in the gold price recently has created headlines. On Monday alone it fell 9%, in the biggest fall since 1980. Given we aren’t a gold bug for a large variety of reasons; it has meant little to us. In fact we think far more interesting things are going on in other commodities, particularly the oil price, which we think is good news for the world economy.
Why Gold doesn’t matter
Why Gold doesn’t matter
This might surprise you, but most gold is speculation or used as a “store of value”. We think that if you wanted a truly then other things like agricultural land, have a more sustainable value in the unlikely event of the collapse of the world’s financial system. You can’t eat gold. You can’t live in it. You can’t wear it. It is more correlated with equity markets than you think (down 30% during the financial crisis). Its only remaining practical function is decoration, and even that is arguable that it is really “practical”. Though don’t get into an argument with a gold bug, they tend to be passionate types (to put it politely).
Falling gold is good
Falling gold prices mean that more people are getting confident again. The recovery, which is under way, but not really yet building a head of steam, needs a strong boost of further confidence. Large sales of gold by the Chicken Littles of the world mean that the big thing missing, investor confidence is starting to return. Still, the falling gold price has distracted us from a more important news story.
Oil matters in the real world
Oil on the other hand is important. This isn’t a value judgement, we wish there were an easily transportable, useable, storable and widely available commodity that could generate that level of energy quickly and easily. But there isn’t. That is the true value of oil. Because oil is used in transport just about everywhere, its price is, in some small way, built into the cost of just about anything you can get in a shop. With all major contracts for Oil at lows over a 3 or 6 month period and trending to continue, thing are looking up for two reasons.
- People: Lower inflation or put another way – better bang for your buck.
- Companies: Better profit margins or cheaper prices.
Oil supply is increasing – it isn’t falling demand
Now Economic growth isn’t wonderful, but neither is a lower oil price a sign of stalling world demand. If anything a lower oil price is one of the economy’s best news stories in years. The reason is an increase in supply. You might have heard that America is on track to be the largest oil producer in the world by 2020 (that’s just seven years away now). Not only that, but American natural gas supplies are booming and they have the lowest costs in the world. They would quickly become a major exporter if the US government had actually given out more than one export license. As the economist describes the situation.
No LNG facility besides Sabine has yet received permission to export. American law requires the Department of Energy to determine whether gas exports are in the public interest, and President Barack Obama’s administration is in no hurry to make up its mind.
So what does this mean?
A few things such as:
- Lower energy prices are unambiguously good for the economy, but the effects will take a while to be felt.
- Big operators of fleets are starting to convert their vehicles to natural gas like FedEx. This means that conversion companies, and fleet operators should both benefit.
- If you take a long view (possibly really long since the US federal government is involved) then natural gas prices are likely to increase at some point in the future with increased exports. So US gas producers could be worth a look.
- There is reason to be cautious for Asian gas producers, since they are currently achieving the highest prices per BTU (a market measure of gas) and may be undercut by American and Canadian supplies in the future.
The Inside View
We have been discussing the implications of the above, particularly energy prices, with our clients for quite some time. If you want your money to be managed by a full-time professional advisor or are simply curious to learn more about what options are out there for expatriates, drop us a line.