Subprime Insight

I have been talking about the Gold/Oil Ratio since February. I called for 1% interest rates and sub 2% Treasury yields (I meant 2 Year Treasuries, I thought that was implied). Although I was not very knowledgeable about gold then, I’ve had a lot of time to learn. That’s besides the fact that I called 2 key trends 9 months before they happened. I got the call on Oil despite the fact that it rallied 50% because I never called a sell.

Here is a historical look at the Gold/Oil ratio again:

Historical Oil vs Gold

Brad Zigler of Hard Asset Investors analyzed recent activity and made a bullish case for gold and a negative one for oil.

Even more interesting is the fact that the Gold/Oil ratio closed at 15 on Thursday and 16 on Friday. Could we really begin to see 30 multiples again? Zigler and I both say yes. But how will this play out?

I once thought we would see both expensive gold and oil. However, recently it looks like we will see a high multiple of the Gold/Oil ratio due to cheap oil and above $1,000 gold. With Oil trending to $30, that would mean a gold oil ratio of 33! A reversion to the mean of 15 could then take place through an oil rally rather then a gold plunge. Where as before I was bullish on gold and oil, now I am only bullish on gold.

Before all my evidence is laid out here the man that called the collapse as he talks about gold on Thrusday:

To call “The Great Depression Part 2″ half a year before the media and government took action has been a highlight of my blog.

I called for government nationalizations in February. At the time, I had a chance to ask Jim Cramer what he thought about Fannie and Freddie. He actually said to go long both. I almost laughed after hearing the response. As a matter of fact, I was harping on nationalizations before Bear Stearns.

On interest rates, I called for 1% Fed Funds rate before summer end in February. Although I got the timing about one and a half months off, I was calling for rate cuts before the Fed Funds went below the rate of inflation. No one thought this was possible.

On currencies, I called the rise of the Yen before people were thinking about about the Eurozone slashing rates.

On the equity markets, I accurately called a market bottom on March 7th on March 6th as the market tip toed with 12,000. I also said that the next time the market touch 12,000, it would crash through.
On Apple (AAPL), I called its agressive move into gaming and sky rocketing sales. However, I have been short the stock understanding that technical reasons are more important in today’s market.

How did I see so much coming? It is important that everyone who invests develop an investment thesis.

If you look at all of the above predictions came from correctly gauging the gravity of the crisis and government intervention. I presented plenty of evidence on why this crisis was unprecedented and global in nature. Bernanke is a student of the Great Depression. He has written about how absurdly far he would be willing to intervene in order to avoid a Great Depression. With a maniac at the helm, you expect drastic action. That means 1% interest rates and government nationalization. That means reversal of carry trades, international cooperation, and most of all deleveraging. Where positive and negative aspects of the thesis interact it is important to determine the dominant factor to gague the dominant trend.