Is Cash King, Or Does Oil Make The World Go Round?

“From how high, to how low?” is the questioning title of an article in the Houston Chronicle on October 25, 2008, by David Ivanovich. The subtitle reads, “Oil’s boom is now a whimper, as demand slows and prices that once shattered records plunge”. I will summarize the author’s musings as he attempts to answer his own question. However, the price of oil is directly influenced by the value of the dollar.

The author chooses, like most, to view the topic from a tail wagging the dog perspective. He states, “Institutional investors and other speculators, who had waded into oil commodities and helped drive up prices to unheard-of heights, have largely fled the scene”. There’s no doubt that speculators are out to make money, by buying a commodity like oil (or gold, or real estate) when they think the price is likely to rise and they’ll be able to sell for a profit. However, they also help sustain the market for buyers and sellers and provide ways for individuals and businesses to offset risks. Furthermore, easy and plentiful money is the fuel with which all would be investors and speculators use to buy up any commodity traded, thereby driving the price higher. Tighten the money supply and there will be not enough money with which to continue buying.

Ceteris paribus: when the value of a good or service falls, the quantity demanded increases, according to the law of demand. Barrels of oil are traded around the world in US dollars. When the value of the dollar goes down, more dollars are required to buy the same barrels of oil. The inverse is also true. When the dollar goes up in value, fewer dollars are required to buy the same barrels of oil, hence the price goes down; money becomes the dog that wags the tail. In this case, the tail is oil.

This would explain the bulk of the major price trends in oil. Watch the value of the dollar, and understand how it is strengthened and devalued. Understanding the money supply in relation to goods and services is the key to understanding where the price of oil is headed. Based on the data on the next two pages, it becomes even more apparent that the price of oil is directly influenced by the value of the dollar. In fact, we can say they are the inverse of each other, or move in opposite directions.

Click the link below to see the data…

Dollar Chart vs. Oil Chart

Are You Truely Investing… Or Just Gambling?

Let’s start with the three things one can do in the Market (any financial market). Gamble, Speculate, and/or Invest.

First off, gambling is betting on an uncertain outcome. It’s when the odds are against you, and you have no advantage. One has a 50/50 chance, or less, of being correct.With that said, you can gamble in anything, sports, casino, even with your life. Some use the stock market to do it. But the stock market in itself is not a casino or a gamble. If you truly thought it was, would you continue to contribute to your IRA , or 401k (your nest egg in your old age), both of which are heavily involved with Wall Street.

Secondly, speculation is the act of buying an asset (of any kind) at one price with the intention of selling it for a higher price sometime in the future. No matter if that’s 3 days, or 3 decades from the time you bought it. Buying low to sell high is the thought process. But that’s not all; you are only doing this when you are reasonably certain of the out come. An anticipation based on facts, or what you know to be true. This puts the odds in your favor. You see an advantage, and do not proceed unless you do. No diagnosis, no prognosis. No prognosis, no profit. Most companies speculate in the course of their daily business. For example, a company buy materials cheap, process them in to a product, and then sell it for a higher price. And do this over and over again. Or like flipping houses in the case of real estate.

Third, investing is buying an asset for a rate of return, a cut of the profits in other words. Like dividends in the case of stocks, rents in the case of real estate. Moreover, you are not doing this with any intention of selling the asset at a higher price; it is a permanent buy, which you may hand down to your future generations, possibly.

Hopefully, we now have a good understanding of what it is we are really doing when we attempt to make money in the Market. I wanted to make that understood, because, a lot of us in the investing community think we are speculating or investing when we are really gambling (no research, 50/50 chance) and just don’t know it. Then we blame it on the Market when we lose. And a lot of us think we are investing (research, permanent buy for a rate of return), when we are really trying to speculate (research, buy low, sell high). It is extremely important to know from the start of a thing, exactly what it is you are actually attempting to do if you want to achieve some real degree of success in it.