It’s Time to Check the Mailbag

by | published August 1st, 2014

It’s been awhile since I answered some mail.

So today, as the dust starts to settle after a long week for the markets, it seems like a good time to hit the mail bag.

Several of you have sent me notes in reaction to last Tuesday’s article about my encounter with the “Steak Bandit,” and what it suggested about asset values.

As you may recall, the incident of the stolen steak reminded me of a tongue-in-cheek response I had given to a caller on my talk show in Chicago back in the 1970s.

In a period much like today, I had suggested that instituting a “steak standard” might be the answer to a wavering dollar.

I tied that bit of 40-year-old fun with the more serious observation that oil futures contracts offer us a much better standard, and had already begun to replace gold as the primary store of value in the market.

That prompted a question from “dedbtheonlywho asked: How does making oil futures contracts the base of currency valuation mix with the volatility you describe in “Oil Vega?”

It brings up a good point, but here’s my take on this…

First off, in observing that crude oil futures have been moving into such a position (as a main reservoir for market value), I wasn’t suggesting this was a good idea. Volatility in crude oil futures prices will certainly create its own problems. And, as we’ve certainly witnessed over the past few days, that volatility goes down as well as up.

Nonetheless, a commodity such as oil – unlike gold – has an independent market value that is well understood. In contrast, the exchange value of gold is essentially an artificial secondary value to its actual use in the market.

So what about the “oil vega” problem?

For those of you who aren’t familiar with this term, it references what I discussed in my book The Vega Factor: Oil Volatility and the Next Global Crisis. In it, I explained that the “vega factor” is the rising inability to determine the genuine value for crude oil based on its market price.

It is built into the way in which oil is currently traded and the uncertainties that are placed upon traders in setting prices. One of the primary elements in this coming about is having the “value storage” problem entirely a byproduct of the futures oil trade itself.

However, a firmer connection between an oil trade at some future date and a value consideration now more directly linked to a broader applied exchange value would bring in more hedgers (those more concerned in the currency or other aspects of the futures contract), thereby at least offsetting some of the volatility.

Remember, the volatility of oil is at least partially the result of the fact that trading in the futures market is confined to those arbitraging “paper barrels” (futures contracts) and “wet barrels” (actual consignments of oil to be delivered). Expanding this element to those with other interests (currency spreads, for example), may actually cancel some of this out.

Then again, utilizing the current position of gold, by default, hardly helps in this regard. In this case, the pricing fluctuations in gold have been even worse with the price levels only indirectly having anything to do with the actual immediate condition of the economy. Indirect gauges are like that.

Then there was this comment by Wren Hyder, who took the “steak standard” more literally:

For a long time (20 years or more) I have said we need to pin the value of our money to the only thing that can sustain life, “protein.” That would establish farming as the basis from which we draw value, a principal long lost by city folks, who have no idea where their food comes from or how hard farmers work to produce it. Your “Steak theory” is not without merit.

Wren makes a great observation. And without saying that I am now committed to a national crusade to introduce the steak standard, he brings up a consideration that deserves to be addressed.

For some time, my academic studies have revealed a rather startling fact. For the past five decades or so (roughly since 1962), crude oil futures have exhibited a very close correlation with agricultural futures.

Put simply, oil and agricultural products have shown the closest similarity of anything else included in futures contract trade. In fact, several major studies have indicated agricultural futures move very closely in tandem to oil futures. I actually discuss this at great length in The Vega Factor.

Now as you might expect, national and state governments regulate food-related futures far more stringently than they do raw materials. The reason for this is rather straightforward. A speculative bubble in, say, wheat or soy futures, would have a more crippling and broader impact on the economy.

But Wren has introduced something else that merits serious consideration. If it’s true that we will see an increasing amount of arbitrage among energy futures (oil, natural gas, electricity), what would prevent this trade from crossing over into other categories (agriculture and metals comes to mind)? The answer is… not much.

In fact, when it comes to agriculture, I anticipate that the first bridge into this portion of the futures will be for  one of the staple commodities for rural energy – propane.

Finally, in reaction to an earlier story entitled: What I Plan to Tell China Tonight About an 800 lb. Russian Gorilla, Sig Skaley writes:

Very interesting. Since the USA is now a major producer of oil & gas, could they not ship some of it to Europe and ease the pressure?

Sig, this is something I just covered in great depth in the latest issue of my Energy Advantage.

The short answer is yes, oil and gas exports to Europe are ramping up right now, with the “hit period” coming about this time next year.

So stay tuned. These new oil and gas exports are going to make all of us some serious money!

PS. In case you missed it, I delivered an urgent briefing yesterday on how the chaos in the Middle East is about to “go global.” Now a select group of companies is poised to benefit in a very big and unique way. To get the full report, including what it means for your money, just go here.

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  1. R. Patricki GILSON
    August 1st, 2014 at 19:57 | #1


  2. August 1st, 2014 at 20:05 | #2

    How about an update on LINC?

  3. R. Patricki GILSON
    August 1st, 2014 at 20:20 | #3


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