Comm: Precious

(Houston)

You wouldn’t think it with oil prices still at only $50, but the US oil industry is humming along. In line with that, Goldman thinks that there are some good buys to be had. Investors have been warming to the oil sector, but not buying it wholesale. Instead, they have been very particular with their investments. They want discipline in the companies they are buying, with restrained capital allocation strategies, and better cash flow profiles.


FINSUM: Sentiment on oil is certainly improving. A lot of it seems to stem from more bullishness on the economy as a whole, as a better economy would presumably increase demand for commodities.

(Houston)

The oil market is currently caught between two competing views. On one side are those who think that oil will continue its century long boom and bust cycle, feeling that is bound to rise again. Others think that cycle has finally been broken and that oil will stay low and range bound for a long time. The argument of the latter is that shale oil has finally made the market competitive, meaning that supply can efficiently rise with demand, keeping prices stable, something that has never really happened in the oil business.


FINSUM: We think the debate over the competitiveness of supply is secondary to what we view as a false assumption of demand growth. Total oil demand peaked over a decade ago in the US and Europe. Emerging markets will likely follow the same pattern, so why is the world expecting big demand growth (especially with renewables growing quickly)?

(New York)

Despite big gains in the stock market, gold has also done very well this year. Geopolitical issues and worries over market valuations seem to have given a lift to the metal. However, despite the ongoing trouble in North Korea, more volatile markets recently, and weakening inflation, gold may not be a great bet. One of the big reasons why is the Dollar. Part of gold’s strength this year has been the Dollar’s weakening. However, that trend may come to an end soon, as the Dollar may be set to reverse. Gold is priced in Dollars, so when the latter is weak, it tends to strengthen and vice versa.


FINSUM: So the one big thing on gold’s side right now appears to be the belligerence of North Korea and the tensions it is causing for financial markets. Also, given the Fed’s dovishness, it is hard to see a big Dollar rally starting.

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