Long Gold, Short Oil?

Posted by Lawrence, May 29, 2008 6:18PM

@5:30 - That's genius. You called me a douchebag with the anticipation of not having the comment posted. So why comment in the first place? I left your comment because, unlike you, I'm not a db.

Here's the response I wrote for the benefit of those who aren't going to scroll through my whole rant on PopSerious:

"First off, you’re making the assumption that the Chinese economy will sustain this growth four years out. It may not. I know of several manufacturers who are looking elsewhere because they find that China is starting to cost too much.

But, besides that, the point I’m making is that the rise in prices for both gold and oil were due mostly to a devalued US dollar. There was no fundamental reason why the relative value of oil increased versus gold beginning just a few months ago. My take is that it’s a short-lived speculative bubble.

Also, someone on DB said that the supply of oil is flat and that running a gold mine is easy. The total amount of gold mined can fill up only four Olympic sized swimming pools whereas we haven’t even begun to drill off the Eastern seaboard of the US, let alone elsewhere."

Posted by Lawrence, May 29, 2008 7:59PM

@6:37 (aka: "Douchebagsayswhat"):

I'm still trying to make sense of your comment because I don't fully understand imbecile. Nonetheless, here's my shot:

At what point did I say to short gold? This is dollar-neutral play based on the relative value of gold to oil. The idea is that oil can fall (and now pay attention because I know this may be hard for you to grasp) RELATIVE to gold. They both can go up in price, too, but the idea is that gold is more likely to go up faster than oil in that case until it reaches 9 barrels of oil per ounce.

Given that you're a schmuck let me help you out: The dollar has nothing to do with this. When you only long one commodity, you are implicitly short the dollar. So, if you're long oil without, say, shorting gold, you believe that sometime in the future, you will need more dollars to trade for the same amount of oil. However, when you are short oil AND long gold in relatively equal dollar amounts, you aren't taking a dollar position. You are taking a position on oil RELATIVE to gold. What are you not understanding?

Your "arguements" are pointless, other than to say you've once heard about GLD from a friend (What, they're the only owners of gold?) and you once heard that $1 billion goes into commodity index funds a month. Hey if that $1bn were spent entirely on oil (and it's not), it wouldn't amount to seven hours worth of oil output in the entire world. The entire premise is that, in the last several months alone, the growth in demand -- however large it may be -- does NOT merit a the percentage growth in the price of oil RELATIVE TO GOLD. It's a point many Americans don't seem to get because they view everything in dollar terms.

Please entertain me by buying as much oil as you can, 6:37. Buy it with every penny you have and when you're done, mortgage your house, cash in your kids' college funds, and borrow money from your best friends, too, and use every single penny of that on oil contracts. Perhaps short some gold, too. Show me I'm wrong. Please, please, please do that. Only YOU, 6:37, can prove to me the error of my ways and how little I know about the markets.

Or, maybe you should go back to pumping penny stocks to little old ladies or whatever it is you do. This is clearly over your head.

Posted by Lawrence, May 30, 2008 3:21AM

Perhaps the best way to understand this is to consider gold a currency itself. In currencies, it's possible to go long, say, the euro and short the yen. That doesn't mean one believes the yen will devalue against the dollar. It just means one believes the yen will go down against the euro. You are merely buying euros using yen.

Going long gold and short oil is the same as plainly going short oil but denominating it in a different currency, in this case, gold. The fundamentals have not changed in oil over just the past five months or so for it to run up from a "price" of 0.105 oz. per barrel to a "price" of 0.143 oz. per barrel. That is, we haven't depleted our oil reserves that significantly, the Chinese haven't consumed that much more oil, and worldwide growth hasn't been that much greater. Long term, perhaps that may be the case. Short term, though, -- and I mean over the last couple of months -- it's not.

Though the "price" of gold being about 0.105 oz. has held for quite some time, I'm not wedded to it in the long term. As Keynes pointed out, that's when we're all dead anyway. In the meantime though -- the next few months, anyway -- I can see it return to near that price.

As for the question "who is demanding gold?", that's the wrong question. The real question is "who is shorting the dollar versus gold?". The value of gold versus the euro hasn't run up nearly as much as it has versus, say, the British pound. Nor has the price of oil gone up nearly as much versus the pound as compared to the dollar. This isn't just an inflation issue. It's a short dollar issue. That said, the oil versus gold trade is solely a short of oil against the currency of gold.

This apparently doesn't sit well with the person who has consistently called me "douchebag". Perhaps he's upset considering his company, Edison Mission Energy, is in the oil business and he's thus implicitly long oil.

And with that, I have nothing more to say. Let's let the markets prove us right or wrong. Name-calling will get us nowhere.

Posted by Lawrence, May 30, 2008 9:24AM

That's enough, Mike.