Bye Bye?
It looks like the insanity in the oil market may be nearing, or has possibly even reached, an end. A great unwinding may be at hand from the Tulipmania or NASDAQ 5000 of these times.
We’ve compared the spike in oil and other commodities like gold with the decline in the dollar since the fall of last year, and, up until recently, there was an outstanding correlation — going long oil, gold or other commodities was pretty clearly an effective way to short the dollar in an almost risk free environment. Something has changed, however, in recent days.
Since early April, gold and oil have moved in opposite directions. Gold’s price, in our view, has retreated as the market has judged, correctly, that the dollar’s decline is nearing an end for multiple sound reasons (a halt to interest rate cuts, global slow growth or recession, etc.). Meanwhile, oil’s price has become completely untethered from reality in an insane speculative frenzy, even versus other commodities (which have had their own bull markets).
It’s over, or at least coming to an end, in our opinion. The fundamentals do not support current oil prices, as industry veterans say, and that situation is ever more glaringly evident each day, as economies weaken in the West (and it’s likely to get significantly worse in the BRIC countries than anyone now anticipates). Of course, we may be wrong about this — but the last man who bought an insanely expensive tulip bulb, or an internet stock in March 2000, thought that the price would go yet higher. Peaks are only understood in retrospect.