Gold and oil don’t have much in common. The former, which is almost never consumed, is generally admired in one form or another for eternity; the latter is destined for a relatively short life after extraction from its natural environs. There is one exception, though. Gold and oil share an infamous link: inflation.
Gold is the medium that historically has offered a hedge against inflation. Oil, if its price rises high enough and stays elevated long enough, is said to be a primary driver of inflation at a rate above and beyond what central banks consider acceptable.
The value of the link as a window on the future, like most relationships where money’s concerned, is open to debate. Empirically, this makes perfect sense. The instances of twin bull markets in gold and oil that’s also accompanies by rising inflation are relatively rare. The last clear example came in the late-1970s and early 1980s.
So, where’s the relevance? In the eye of the beholder.
For those who believe, the current dance of gold and oil looks potent. Gold and oil, in case you didn’t notice, are running higher. The metal that many equate with money soared yesterday by more than $10 an ounce to $613 and change, the highest in a generation. Oil, meanwhile, closed up a buck in New York futures trading to close on Monday at over $70 a barrel, a new all-time high. The fact that both commodities are ascending together, with conviction, raises questions about what it means.
The easy conclusion is that the inflationary warning signals are running full out. Yes, geopolitics is arguably the main driver in the bull market in energy. But if energy’s inflationary signal casts a long shadow, the reasons for the price hike are all but irrelevant. Or so says the gold market.
And then there’s the bond market. Yes, the yield on the 10-year Treasury Note slipped slightly yesterday, although it still held above 5.0% for the second trading session. The five-percent mark is the highest since June 2002.
More than a few eyes are focused on the bond market as a means of tipping the scale one way or the other–lending confirmation or denial to gold and oil’s warning. If the 10-year yield keeps rising, the trio of omens will be that much tougher to ignore.
That’s why attention on the housing market is destined to increase for the foreseeable future. The housing market is the Fed’s favorite benchmark these days for deciding if the central bank’s having any effect on investor perceptions. There’s just one problem: defining the real estate trend du jour is more art than science.
Any number of statistics define housing on any given day: new housing starts, existing home sales, mortgage activity, to name just three of the usual suspects. Unfortunately, housing numbers can and do give conflicting signals at times. Consider that the latest installment of the National Association of Home Builders sentiment index registered a decline, giving the bond market reason to buy and thereby lower yields a bit on Monday. Score one for the Fed and its campaign to slow the real estate bull.
But the message hasn’t yet found its way into every nook and cranny of the property market. In fact, by some accounts the market isn’t slowing so much as it is returning to something approaching a calmer state of supply and demand. “We’re returning to normal,” Ellen Daly, founder of Daly’s Properties Shoppe in Gardner, Mass., tells the Sentinel & Enterprise. “We’ve had a very, very brisk market for several years and it just sort of plateaued a little, and now it’s coming back at a nice, normal comfortable pace.”
Is that perspective widespread? Will it convince the Fed to call off its rate-hike assault? Or, is the property market cooling at a pace that Daly and others don’t yet recognize? Such questions aren’t easily answered when it comes to the real estate market. As a result, it’s not yet clear if the gold and oil markets are harbingers of trouble or just isolated bull markets?
The case for arguing the two are isolated rests heavily on the fact that the government’s official measure of inflation has been calm and well behaved of late. In fact, an update of consumer prices for March comes tomorrow, giving another opportunity to embrace or dismiss the gold/oil show.
Even so, there’s a mismatch of timing when it comes to searching for clues about inflation with commodities that are priced in real time. Traders must buy and sell now, this second. The forces that send inflation higher, or lower, are slow moving, and at times virtually imperceptible to the garden variety analyst. That won’t stop the markets from making a bet, although the accuracy will remain in doubt until hindsight renders its always perfect analysis.
In the meantime, it’s anyone’s guess. At this moment in history, any number of macroeconomic and geopolitical catalysts are waiting in the wings, fomenting the variables that hold the potential to surprise and shock on a scale that’s grander than usual.
Volatility, it seems, may be the only sure bet when it comes to bull markets for the foreseeable future.