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A Tale of Two Commodities

08/19/2011

Normally, we talk about commodities as a single asset class, as they have the common characteristics of benefiting from both growth and inflation.  In other words, they’re normally good to own during the expansion part of the cycle but not the contraction part of the cycle.  They’re also reasonably good inflation hedges. 

But, take a look at the dis-similar recent behavior of gold and oil.  Gold just passed another record high of $1880, while oil is dropping below $80.
Clearly, gold is a store of value during tumultuous times, while oil is not.  Oil is a consumable, like corn or wheat.  Also, oil may not be not profitable during the contraction phase, when demand is falling. 

That last sentence is worth reading again.  The Arab world usually prices their oil off Brent prices, not WTI like the U.S.  Brent oil is now selling for about $105 per barrel.  While it varies considerably among producers, the average cost of production is about $85.  Adding credit problems in the Middle East to the credit problems in Europe will not be helpful to the world economy.
Like people, commodities have very similar characteristics . . . except when they don’t.

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