A Secret Meeting – No Cell Phones Allowed
It is 11 a.m. here in London (6 a.m. back on the East coast) and critical matters are unfolding as I write this.
I will still visit Windsor Castle tomorrow afternoon (Friday) for the beginning of the annual Windsor Energy Consultation where I’ll be speaking.
However, my schedule between now and then has changed.
Normally, the latest installment of OEI would appear tomorrow.
However, global developments are revising my schedule.
As you read this, I will be moving to a secure session in The City (London’s financial district). It is the type of meeting that will require attendees to hand over their cell phones before entering.
No email. No phone calls. No outside communication.
The meeting has been called by several important figures who will be attending the Windsor affair, and they will provide direct transportation to the Castle.
Marina will follow our earlier plans, take the train out, and meet me there tomorrow for afternoon tea (this is, after all, still England).
Given the blackout later today and the restricted access to the Internet at the Castle, OEI is coming a day early.
So here is what’s happening.
The price of gold plummeted yesterday by more than 5%.
I suspect the reasons for this given by the TV talking heads have emphasized improving economic recovery prospects in the American market, the realization that the Fed is not likely to be adding any new stimulus in the near term, and a rising perception that gold is no longer as necessary in the role of a “safe haven” investment.
All of these are adequate, as far as they go.
But there is another side of this story that will soon provide even greater volatility to a pricing market that OEI and all my Money Map energy investment services happen to emphasize.
The oil market.
The Iranian Boycott Is Fast Approaching
Instability in the oil market (due to the oncoming European Union (EU) boycott of Iranian oil exports on July 1) has been a matter I have addressed on several recent occasions.
And it is the reason why I have spent a week in London prior to the Windsor convocation.
The EU has made a policy decision, but continues to have great difficulty controlling its effects within Europe. This is especially the case with struggling members like Greece, Italy, and Spain.
These three countries are far more dependent upon Iranian oil than the other eight EU countries importing it each month.
This has resulted in a further acceleration in the price of Brent benchmark, set here in London. West Texas Intermediate, traded on the NYMEX in the U.S., has also been going up. But the EU decision will have a more pronounced impact on Brent (and, thereby, Europe’s pricing structure).
And then the gold price dive hit.
The great concern today, and the reason for this afternoon’s meeting (one guaranteed to last until morning) concerns the transition from gold to oil futures as an increasing counter balance.
There are two aspects to this, both adding to oil pricing volatility and the misgivings surrounding it.
Debt Problem Rears Its Head (Again)
1) There has been a connection established between discounted European credit at risk and inflated oil futures premiums. This has been ongoing for some time. I identified the connection for the Greek Finance Ministry last summer (see The Greek Debt Crisis and the Price of Oil June 20, 2011).
But it is now going to become more pronounced.
The fear in London may become a panic in short order because the U.K. is now experiencing contagion from the widening European debt fallout. A great deal of financial paper centered in The City may soon be at greater risk.
As such, the fall in gold prices will merely exacerbate the use of crude oil futures as a way of collateralizing reduced valuation on debt holdings.
Measuring the True Value of Oil
2) Oil may become the new commodity in which to store value, at least in the immediate term.
Traditionally, gold has held an advantage because of its otherwise uselessness.
One of the quirks in markets is the designation of an asset as the primary receptacle of value in uncertain times because of its limited commercial use.
Well, that historical approach has been morphing somewhat of late.
Gold has remained the most widely used “flight to value” asset, but the volatility in markets itself has provided another approach – one that seeks an almost guaranteed higher return from using other assets that do have significant commercial usages in place of gold.
Copper may serve a similar function in certain market environments and the proportionately greater value appreciation in silver over gold may be another more limited application example.
Oil, on the other hand, has a pervasive impact on all aspects of commerce. Paper barrels (the futures contracts) now drive the price of wet barrels (the actual underlying consignments of delivered oil).
They already have a store of value having a much broader impact on the market.
We may now be witnessing a more expansive usage of the stored value approach, at least in the widening instability likely to hit as we move closer to July 1.
That is the essential reason for the meeting that I will be attending in a few hours.
It may also result in the single most important development for energy investors to emerge in quite some time.
When the dust clears, I will revisit how you should invest in this new terrain.
P.S. What are the underlying factors affecting oil prices? The newspapers and networks are getting this wrong. And it’s a shame, especially once you see what’s at stake. So to get the true oil story, take a look at my latest presentation. As you’ll see, you could make a killing on this next big move in crude…
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