Oil Looks Ominously Like Gold Trade

NEW YORK ( TheStreet) -- Oil is going through another major change in the way it's being traded: It's acting less like oil and more and more like gold. And believe me when I tell you folks, oil that trades like gold is not a good trend to be noticing. It has the potential to create the last headwind to an already slow economic recovery and sink us into a true double-dip recession.

I've spent much of the last three years describing how oil price responds less to supply and demand and has instead turned into a capital market not unlike stocks and bonds, where price is determined by financial influences of speculation and investment. In my book, Oil's Endless Bid , I argued that oil, which has been far more volatile and expensive than it otherwise should have been, was a major factor in the economic collapse of 2008 and is holding back progress to our recovery.
oil

That's because oil is such a critical component to the economic health of both business and consumers. It is universally detrimental to have oil acting more like stocks and acting less like, well, like oil.

But recently I've seen a new layer of money begin to chase oil -- with a different motive than the previous investor desire to add to the diversity of their stock and bond portfolios. Now, it seems more and more apparent that oil is being used as a safe-haven trade, in the way that previously only precious metals and the Swiss franc have been used. Oil has begun trading more like gold.

How else can you explain oil's recent price action? We've had a very strong and very destructive correlation between oil and stocks particularly since 2008, but in recent days we've seen the stock market sink 600 points, while Brent crude continues to price close to $117 a barrel. This has occurred despite horrid GDP and durable goods numbers as well as unemployment and housing slowly getting worse. Despite all this bearish news, oil just refuses to go lower.

Investors seem to have found another "Armageddon trade" to hedge their faltering portfolios --oil. Investors can't take delivery and store it, but they seem more and more willing to diversify their precious metals holdings with financialized "black gold."

It makes sense but it has the potential to be incredibly destructive to our already weak recovery. Gold has been an entirely one-way trade, going up no matter what the news or circumstance. But commodities by their nature can only create fair prices when the balance of buyers and sellers is more or less equal. In gold, the appetite has been tough to satisfy. This has been true of oil as well, but the new addition of this latest layer of "gold-like" buying in oil has added even more upwards pressure on the price.

And the point is clear: If gold continues to attract buyers and rallies to $2,000 an ounce, all that happens is that some investors have accumulated some very expensive metal.

However, if appetite for oil causes it to rally to $200 a barrel, the entire global economy will come to a screeching halt.

This is a trend worthy of some serious worry. It is becoming less and less clear what will need to happen to either stem the investor avalanche of capital into oil as a safe-haven diversifier, or what horrible financial event will be needed to burst this bubble. With oil prices hovering around $120 a barrel with continuing worsening economic news, any good sign for the economy at all could spike oil prices to the tipping point that halts any progress.

And into another recession.

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