"Historically, one ounce of gold would buy about 12 barrels of crude oil. Market analysts believe that relationship may not be as applicable as it once was. The ratio of the price of gold to the price of oil is now at its lowest level ever, around 6:1. In other words, gold has never before been this cheap compared to oil. But the odds of gold doubling in price are as long as those of a collapse in oil ... Similar scenarios have been presented to the gold/oil ratio throughout time, but the relationship has always survived. Now, however, analysts believe the ratio is doomed as alternative methods for hedging inflation have been found. 'At times of negative real interest rates, plus high and rising inflation, we saw gold used as an inflation hedge,' says Rhona O'Connell of GFMS Analytics. 'But for the last 10 years, until recently, there has been no inflation to worry about. Are we going to revert to the gold/oil ratio? No, this is simply not going to happen' ... 'There are two main reasons for this,' says UBS analyst John Reade. 'Central banks have got inflation under control, and there are better alternatives than in the past to manage inflation, such as inflation-linked bonds [TIPS], which didn't really exist back then.'"
----(Barron's - 9/19/05)
Schaeffer's addendum: To gold bugs, these are "fighting words." But even to the objective observer, this complete and thoroughly disrespectful dismissal of gold even as it trades at a 17-year high should be enough to provoke a pretty strong contrarian reaction. "The odds of gold doubling in price are as long as those of a collapse in oil?" Let's not forget that it wasn't too many months ago that a collapse in oil was deemed to be a sure thing. Does anyone care to lay me some big odds on gold doubling in price over, say, the next couple of years?
Bernie Schaeffer
"Amid warnings from economists that real-estate values in some parts of the country may drop eventually, there is a nascent movement to offer new investment products designed partly to hedge against falling property prices. The goal: Offer limited protection against the risk of riding real-estate prices back down again after the record run-up in recent years. In recent months, Merrill Lynch & Co. and other investment banks have started offering investment products that will rise in value if a basket of housing-related stocks declines ...The Chicago Mercantile Exchange also is preparing to announce plans to introduce in the second quarter of next year futures contracts based on home prices in each of 10 cities. It will also offer a composite contract covering all 10 cities. That plan follows the introduction last May by HedgeStreet Inc., based in San Mateo, Calif., of financial contracts called Hedgelets that let investors bet on a rise or a fall in home prices in six individual cities."
----(The Wall Street Journal - weekend edition - 9/17/05)
Schaeffer's addendum: Inquiring minds want to know: Who is on the other side of these bets on falling house prices? We know who the natural buyers are - all those homeowners who are worried sick that a pop in the "real estate bubble" will take a major bite out of their assets. But who these days is looking to sell puts on house prices?
If the other side of this "bubble protection trade" is simply doing so to provide a market, you can be sure that the cost of this protection is going to be astronomical as is always the case when there is a one-way market. In fact, the cost would likely be so high as to make it economically unsound for the homeowner buyer.
But if there are willing sellers of these puts and futures contracts that will keep the protection priced at reasonable levels, you then wonder if the truly smart money is betting on continued strength in housing prices or, at worst, a flattening of prices rather than a significant decline. I've noticed four separate magazine covers this year heralding a plunge in housing prices - in Barron's, BusinessWeek, The Economist and New York Magazine - so there is certainly a bullish (or, perhaps better put, non-bearish) contrarian case here that is all the more accentuated by the publication of the piece cited above.
Bernie Schaeffer |
