You Can’t Blame The Fed For Rising Gold & Oil Prices

The Federal Reserve ($FED) gets a lot of blame for rising gold and oil prices. I mean, it kind of makes sense. Everyone thinks they are “printing” money, and everyone knows from economics 101 that if you increase the supply of something (the dollar , the price of it will go down. However, we know  the “printed money” is doing nothing and is just sitting in reserves.

But don’t take my word for it. Check out the following charts that show how fundamentals are driving both gold and oil-and not $FED “money printing”.

Gold

The reason why gold has been rallying is because the demand from Asia (specifically China). Gold’s not rallying because its an inflation hedge. Gold is rallying because of demand.

Emerging Asia’s Share of Global Demand

 

 

China CPI vs Gold Prices

PragCap does a good job in dismissing the notion here that Gold is correlated with US inflation.

 

 

Oil

To blame oil and gas prices on the $FED is laughable. The fact is oil prices are largely determined by basic supply and demand. The reason oil is over $100 right now is because growth is improving (demand) while supply is shrinking, or in threat of being shrunken (Iran Sanctions, Iran threat to close Straight of Hormuz).

Even though 7 out of the 15 largest oil producers are outside of OPEC, OPEC still has major influence over oil prices (produce roughly 40-45% of world’s oil). If they wanted, they could ramp up production to get oil down to $80 tomorrow (but obviously not a smart move on their part). The thing with OPEC is, that they are viewed as one entity (they make decisions together for the most part). While the Non-OPEC nations are not united as such.

The chart below shows, Total Oil Production, Total OPEC oil production, and Oil’s price. As you can see, oil production has stayed relatively flat and prices have mainly been in an uptrend (minus the recession).

 

 

Also, the world has been running “deficits” in oil for decades. 2010 saw the biggest “deficit”, meaning consumption (demand) is at the highest post its been.

 

 

Fed Printing causing spikes?

Besides the fact that Oil is fundamentally driven by supply and demand. There is no correlation between the Monetary Base (“Printed Money”) and Oil Prices. If you see a relationship here, let me know.

 

 

The theoy that the FED is printing money which is causing inflation (which they really can’t, they could just cause inflation expectations to go up) which is causing oil prices to go up are completely bunk. Not only does it not make sense, but there is also no data that can back up that point.

 

Tags: $FED $CL_F $USO $NBZ_F $BNO $GLD $GC_F $MACRO

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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