- 2000: Volume 9, No. 6 Chartist Corner: Oil Boils, Gold Don't Shine

The outbreak of violence between Israelis and Palestinians triggered volatile moves in many markets, notably the petroleum complex (for obvious reasons), currencies and the U.S. stock market. Some other markets began to heat up including coffee, copper, wheat, cattle and hogs, although it's doubtful the latter three will embark on sustained moves.

What's Hot

As could be expected, crude oil, unleaded gasoline and heating oil rallied sharply in response to the outbreak of violence between Israel and Palestinians, which sparked talk of an Arab oil embargo. However, the price spike was brief, quashed by Saudi Arabia's vow to supply extra crude to the market if necessary to keep prices down. In fact, OPEC is getting nervous that record high energy costs may throw the global economy into a recession, which not only could trigger a big slump in crude consumption and prices, but trash OPEC foreign investments. Because of the outlook for OPEC to keep the market well supplied, we doubt that further violence in the Middle East would produce as sharp a reaction. On the other hand, prices are likely to hold recent major support levels ($30-32 per barrel) since a fragile cease-fire isn't likely to hold (Israeli and Palestinian officials didn't even sign the cease-fire agreement). In addition, heating oil supplies are still very tight and a colder than normal winter is forecast for the Northeast. The result is likely to be a volatile trading range.

The U.S. stock market appears to have peaked and, in fact, may have embarked on "the big one" to the downside. Over the past few months investors have become increasingly worried that corporate profits are on the decline, particularly U.S. multi-national companies hurt by the weak euro. There's also concern that persistently high energy prices will slow the U.S. economy further. There have even been whispers of a global recession. It's bad enough that smaller mutual fund investors are turning sour on the market, but the huge institutional investors are likely to start trimming their portfolios in reaction to the shifting economic outlook and the downturn in the major long term technical trend indicators.

What Might Get Hot

The wheat market jumped higher in response to persistent dryness in the U.S. hard red winter wheat belt which caused planting delays and slowed germination. In addition, dryness in Australia's belt is likely to hurt output. However, despite current adverse weather, it's a bit too early to get overly concerned about U.S. production. Wheat (a grass) has the amazing ability to recover if favorable conditions develop, either this fall or next spring. Also, enough rain appears to be in the mid and long range forecasts to allow completion of planting and insure adequate germination. There's no doubt that a weather premium is warranted but we have a feeling this market won't be able to get above the $3 level unless crop problems occur next spring, and that's a long way off.

What's Not Hot

Gold barely rallied in response to the crisis in the Middle East and quickly retreated. Historically, gold has been a safe haven and inflation hedge, but that's been changing over the past twenty years. With the advent of highly liquid global financial markets, particularly futures and options, investors now have a wide range of alternatives to hedge risks, e.g., the best way to hedge energy price inflation is to buy energy futures contracts or call options. And because central banks are likely to keep selling off gold stocks, prices are likely to languish.