Gold Plus Oil Equals Muddle

March 11, 2009 | By: Hard Assets Investor

By Brad Zigler

Divers know that if you tread the bottom you're likely to stir things up, reducing your visibility. Traders and investors are looking through the current market murk and wondering if they're seeing the bottom.

Regard oil, for instance. That's a market that seems to be saying it's done declining.

NYMEX Nearby Crude Oil

The nearby NYMEX crude contract finally seems ready to defend the $40-a-barrel level. But that's put the squeeze on crack spreads, despite the upward momentum in gasoline prices. Product cracks (gasoline and heating oil), in fact, are in single digits, something we haven't seen since January 2006. The differential between gross refining margins and refiners' cost of goods sold is now below 5%.

Contango's also retreating. The quarterly calendar spread, once measured in double digits, is now in the $2 range. The carry trade, worth as much as $14 a barrel recently, has been pinched to only 80 cents.

The Brent premium over West Texas Intermediate crude, too, has reversed. Monday, dated Brent sold for better than a two-buck discount to WTI in the cash market.

All this points to potentially higher oil prices, though not everybody's convinced of that, however.

Momentum in the gold/oil ratio has turned downward, a signal that would normally bring some cheer to those looking for better industrial prospects, yet credit spreads are widening again. The difference between three-month LIBOR and Treasury bills inched up 10 basis points over the past week and is now 20 basis points above its recent low.

And gold itself? In a correction, but not one strong enough to threaten its longer-term upward trajectory. At least, not yet. But momentum and sentiment have turned southward. Then there's the worrisome precursor of a head-and-shoulders top on the chart, which makes the defense of the $900-an-ounce level critical.

COMEX Spot Gold

We're not seeing the early warning signs of reflation yet. In fact, the disinflation trend seems well and truly entrenched. Our real-time monetary inflation indicator slipped 37 basis points last week to a new low.

All this makes for quite a muddle, doesn't it?

Perhaps it's best to just tread water ‘til things clear up.

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