Black Gold In The Red

The turmoil in the oil market — with the May contract falling deeply in negative territory — highlights the key differences between the oil and gold markets.

Dear Fellow Investor,

Gold is up strongly today, back well above $1,700 on a spot basis after a few days of correcting.

There are a lot of short-term excuses being made for today’s run, including President Trump’s saber-rattling with Iran. But gold was heading higher before this development, probably in recognition that whatever happens on a day-to-day basis makes little difference for gold.

The yellow metal is heading higher, much higher, for years to come.

That’s because the massive monetary and fiscal stimulus programs announced over the past few weeks have completely changed the game. All the rules have been thrown out the window and no one dares to stand in the way of more spending and easier money.

And it’s not just gold bugs like you and me saying this. The Bank of America’s research team just raised their 18-month target for gold from $2,000/ounce to $3,000, summing up their case as “The Fed can’t print gold.”

They’re absolutely correct. And if past form holds true, they’re more likely to be wrong to the downside in this prediction.

There’s no doubt that we’re living in strange times. That fact was brought home in recent days when the May contract for WTI crude oil fell to a low of negative $37.63.

Yes, they were paying you to take the oil.

The problem was that storage facilities around Cushing, Oklahoma were essentially full to the brims, with no place for the oil to go. So longs who had held onto their May contracts were going to be forced to take delivery, yet they had no way to do so.

That’s why they were willing to pay someone, anyone, to get them out of their contracts.

This remarkable situation highlighted the crazy days we’re having in the world, in the financial markets and in the commodity markets.

The global economic slowdown has been a virtual halt. Demand destruction has hit virtually every commodity...with the notable exception of gold. Demand is soaring for gold as investors around the world anticipate the repercussions of the stimulus tsunami.

But the situation in oil also highlighted the differences in the futures markets for both commodities.

In oil, the longs are being forced to accept oil that they have nowhere to store. In gold, the shorts will be forced to provide gold they have nowhere to find.

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As my friend Peter Schiff put it in a tweet, “What is happening now in the oil market will soon happen in reverse in the gold market. In oil the shorts are trying to deliver, but the longs don't want it. In gold the longs will try to take delivery, but the shorts won't have it!”

We’ve seen a lot of turmoil recently in the gold market as well, as the spread between the spot price and the near futures prices rose dramatically. This was essentially because spot is traded in London while the futures are traded on the COMEX in New York.

When delivery requests threatened to overwhelm the relatively small supplies of 100-ounce bars in the COMEX warehouses, sharp traders began buying the futures contracts instead of spot. This forced COMEX to launch a new contract that could also be settled via the 400-ounce bars typically traded in London.

The whole episode exposed the tremendous leverage in the “paper gold” markets and their inherent fragility. It also reveals that, after many years of physical gold traveling from Western vaults to Asian central banks and individuals, there is precious little gold readily available to support the paper gold confidence game.

So you can expect more trouble and turmoil as demand for gold continues to grow in the weeks, months and years ahead.

Make sure you’re ready for it.

All the best,

Brien Lundin
Editor, Gold Newsletter
CEO, the New Orleans Investment Conference