Fake Inflation, Real Deflation: Gold $1230 and Oil Under $70 (GLD, SGOL, GDX, USO, OIL, OIH)

It has been impossible not to notice the new Gold Rush.  It has also been impossible to not notice the crashing oil prices.  This is simply the decline or implosion of the Euro, and the flood of money heading into gold as the new reserve since the Eurozone cannot get its act together.  We wanted to take a look at the possible “false inflation” of gold versus the potential “real inflation” of Crude Oil.  Technically that would be the “real deflationary” of oil prices.  For these, we are reviewing SPDR Gold Shares (NYSE: GLD), ETFS Physical Swiss Gold Shares (NYSE: SGOL), and Market Vectors Gold Miners ETF (NYSE: GDX) as the fake inflation ETFs and then at iPath S&P GSCI Crude Oil Trust Index ETN (NYSE: OIL), United States Oil (NYSE: USO), and then Oil Services HOLDRs (NYSE: OIH) in the real inflation scenario.  Fortunately, what we are seeing is false inflation to a point, while seeing some deflationary pressures in oil.

Kitco.com lists the gold market at around $1233.00, with a range of $1223.00 to $1243.10.  Kitco also lists gold being up over 32% over the past year and over the last 30 days as being up 8.4%.  The most recent quote in oil was seen at Crude Oil $69.91, down -$1.70 per barrel.  The chart over the last 30 days from BigCharts shows the extreme breakdown of the relationship.

Oil has many issues.  Maybe you can blame BP’s Gulf of Mexico oil spill, or maybe you can say that the E.U. is now just not going to use as much oil after its Greece, PIIGS, and debt crisis.  Maybe this is the charts or assets allocation rather than real demand.  Maybe you can blame all the airline traffic disruptions tied to Europe from the Iceland volcano.  Dow Jones noted earlier today that Qatar threw out $70 per barrel for oil as the floor for new significant investment in capacity.  It has been said many times that oil is in a trading range of $70 to $85, yet here we are again testing the downside of that range.

Gold is simply being used as a reserve currency for the world as the Euro continues to implode.  Its chart also showed explosive ramps up.  Gold is used less and less in industry outside of jewelry and electronics.  Gold has pulled up the price of silver on the lower-end and has somewhat pulled up platinum on the higher-end.

It will be very difficult to see this breakdown in correlations continue endlessly.  A rise in the price of gold is inflationary, at least if it pulls up all other metals.  A rise in the price of oil is inflationary because it is used by the world and is the benchmark for input costs in so many produced goods and services.

As far as using either asset as an investment or as a reserve, the obvious is that oil is far more useful for what can be done with it, but gold is far easier to store.  The price of oil to gold is now over 17.5 barrels, yet you could fit dozens of gold bars into a single barrel of oil.  Sure, that is simple and won’t give you any basis at all for an investment.  But that is worth noting.  Neither gold nor oil can be used directly as food or water.

We are witnessing a deflationary pressure here that is being tied to an inflationary pressure in the metals.  These markets can’t continue to drift apart endlessly.  Not in a rational world.  Maybe a solid pairs trade is forming.  Maybe.

JON C. OGG