A commodity revolution is underway

We had to wait for it, but the link between the oil price and the Canadian dollar has held – oil has rallied and the Canadian$ briefly went lower as oil wobbled before taking off, and now the Canadian is up six days in succession.

It was also helped along by last Friday’s, second month of poor employment numbers, which confirmed US interest rates are not going to rise any time this year.

The run up in the price of crude is coinciding with Copper which, at least for the moment, has stopped sliding and Silver has taken off. Part of the story is the US$. It was kicked into an uptrend last year with the month on month talk of rising interest rates. Now that myth is busted, the US$ has drpooed, helping along commodity prices.

A revolution in energy

The oil story has had plenty of twists and turns with those conspiracy theories of it’s recent collapse and the waning influence of the ‘petro dollar’ as China and Russia bypass the US$ strangle hold on energy pricing.

Alternatives to petrol and diesel are waiting in line to consign oil to the same fate as the dirty unacceptability of coal as the world’s primary energy source. The Saudi’s, even with massive oil reserves, have embraced solar domestically and have said they will supply more solar energy than oil in decades to come.

I recently tried out an electric car for a few days, the contrast with my diesel BMW was stark. The electric Nissan is a driver’s car with great performance, comfort, silence and mechanical simplicity. My old beamer is also an excellent car, but the Nissan made me very aware of my contribution to pollution, smog and the demise of the planet as we know it!

As with all technological development electric cars are moving on. My diesel will run 600+ miles on a tank of fuel. The Nissan needs a top up after 80. With charging points at motorway services, distance driving becomes a series of hops – with 45 minute breaks! Electric cars are not yet viable, but the next generation to be launched early 2016 will have a range of 130 miles. Increasing that to 200+ and bringing the current high initial cost down will cement the revolution.

Growth, no growth, inflation or deflation

As we have just seen with the US employment numbers, real economic growth is still an illusion’ but what of the battle between deflation and inflation? The two are connected I hear you say. That’s quite right of course. GDP is contracting as those payrolls figures show but inflation has still taken hold of a good many consumer products and the most expensive consumer requirement of all.

Housing costs in the UK, Canada and Australia are all at potentially unsustainable levels. Both rental and mortgage ownership costs are at the highest levels in relation to earnings we have seen. Something will have to give. It could be a rise in interest rates that will burst the bubble turning the current housing shortage to a glut and over borrowed new home owners into negative equity.

The alternative is the growth/inflation that governments have tried to ignite with QE and low cost borrowing, a dismal failure so far as it’s inflated the wrong things. Inflation needs to move into average household incomes. Way back in the late 1970’s/80’s inflation kicked off with the Oil price shock of tripling and more in crude oil prices.

When we have seen the lows in commodities, oil, copper, silver and gold, and they start rallying, that could be the catalyst. Add in some form of ‘Helicopter Ben’ money that feeds cash into householders pockets and the deflationary spiral will reverse into 1970/80s style rampant inflation.

Gold and Silver stirring

Both the precious metals respond to inflation or deflation. The charts are showing that Silver has broken out of the summer trading range and, at around a third of the price at its highs, it’s looking good value. Gold has yet to follow so it may be too soon to wade into both precious metals as an inflation hedge. However, the ratio of Gold to Silver is on the move.

Historically the ratio has been moves between 17 and 100. Today it takes 72 ounces of Silver to buy 1 ounce of Gold. The uptrend is now showing signs of reversing so the strategy would be to adjust your Gold hedge and convert some to Silver. This year the ratio hit 80, last seen in 2008 and before that in 2003. Following the 2008 high, the ratio ran down to under 35. It was then time to reverse the trade and convert the Silver back into Gold so you would then have 2 ounces of gold whilst still keeping the inflation hedge in place.

Both the precious metals respond to inflation or deflation. The charts are showing that Silver has broken out of the summer trading range and, at around a third of the price at its highs, it’s looking good value. Gold has yet to follow so it may be too soon to wade into both precious metals as an inflation hedge. However, the ratio of Gold to Silver is on the move.

Historically the ratio has been moves between 17 and 100. Today it takes 72 ounces of Silver to buy 1 ounce of Gold. The uptrend is now showing signs of reversing so the strategy would be to adjust your Gold hedge and convert some to Silver.  This year the ratio hit 80, last seen in 2008 and before that in 2003. Following the 2008 high, the ratio ran down to under 35. It was then time to reverse the trade and convert the Silver back into Gold so you would then have 2 ounces of gold whilst still keeping the inflation hedge in place.

Regards

George

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