Brother, Can You Spare a Gallon?

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Good Afternoon,

New York gold prices were off to the (oil-led) races on this, the first day of July, with a near 2% gain, quoted at $942 per ounce amid rising oil values ($142.00 up $2.00) and a declining dollar (down .17 to 72.28 on the index). Stock futures pointed to a weak opening today, and they indeed followed through on the signal, with the Dow dropping 126 points, as analysts pondered whether last Friday was a bottom, or the beginning of a hairy bear market. Auto sales came in quite weak, denting the Dow further, with Ford's sales slipping 28% and Toyota's (!) dropping over 21% as US buyers stayed away from dealer lots, hoping that, somehow, they can also stay away from the corner gas pump. SUVs anyone? Road trips this summer? Gas stations in parts of the US are reportedly taking credit cards up-front and requiring all kinds of ID in order to prevent some from driving off with a $100 tankful of gas. Locking gas caps are making Pep Boys a fortune suddenly.

Silver added a more robust 4.3%, rising 76 cents to $18.16 while platinum gained $13 to $2064 and palladium rose $5to $465 per ounce. Also helping gold in this session, were reports that the ECB completed sales of 30 tonnes of bullion as of yesterday, and that it does not intend to sell any more ahead of September's conclusion of the current sales year window. The ECB's imminent rate hike decision was playing into the euro's hand today, as the currency rose to 1.58 against the greenback.

The third quarter started on a positive note for the precious metals complex as Middle East geopolitical tensions continued to support safe-haven purchases by previously sidelined investors. Crude oil prices remain in the driver's seat in the markets, and are still seen as the primary factors impacting the US dollar, gold, stocks, and the readings on (current and future) inflation. Tensions between Israel and Iran are the latest premium-inducing factor in the oil price equation, although for now, Israel is content to let perceptions rather than reality do the work in keeping Iran in check, and although the US military has placed odds at 'nil' as regards Iran's ability to close the Straits of Hormuz and disrupt shipments of black gold. If attacked, Iran may have to resort to the one solution it could definitely put into motion: suspension of oil sales and hope that other countries join in in a mini-embargo.

OPEC's president however, is already eyeing weakening demand in the wake of the recent paper oil mania. Today's auto sales reports can only reinforce that sinking feeling. In the financial market background, UBS shares fell to the lowest level in almost a decade in Swiss trading after U.S. prosecutors sought the authority to force the bank to reveal names of American clients with secret accounts by issuing a "John Doe" summons. This investigation could not only hurt the bank in its core and most profitable business, but could open a major can of worms when and if it becomes known who among America's wealthy tried to conceal assets from Uncle Sam.

One commentator who is not so firmly convinced that you should rush out to buy a truckload of gold at $950 or oil at $143 in order to inflation-proof your portfolio, is Mark Hulbert. Mark usually tracks the contrarian view indicators for Marketwatch but has just posted a piece on what investors might do in the face of rising prices everywhere they look. His colleague, Kevin Kerr, by-the-way, would have you buy silver to accomplish the feat. We believe that the core 10-15% gold holding in your basket of assets remains very well warranted, and that it serves as the perennial life insurance policy for your wealth. In that regard, price is always irrelevant, but the percentage of ownership is not. But, on to Mark's take on these things:

" So let's say you believe, along with most of the investment newsletters I monitor, that inflation is going to become even more of a problem in the future. How do you profit from that belief?

Many investors' knee-jerk answer is gold, of course, or if not gold, other commodities such as oil. But I'm not so sure.

That's because commodity prices have already been bid up over the past few years in anticipation of sharply worsening inflation. Their prices could still retreat in the face of higher future inflation if the inflation rate turns out not to be quite as high as commodity investors currently are betting.

Yet another complicating factor in betting on higher inflation with commodity prices is the fate of the dollar. If inflation in other countries turns out to be worse than in the U.S., for example, the dollar theoretically could rise in the face of higher domestic inflation and thereby cause commodity prices to fall in the U.S.