Oil fell $10 yesterday, gold soared. Volatilility was of course the order of the day. It was not a day of rational decision making. Yet the changes in oil and gold are perhaps, highly significant.
It wasn’t the first time oil collapsed recently. It fell from $107 yesterday to $96 this morning. But it experienced a similar sized fall in the middle of this month. In fact, September has seen oil fall from $111 to $93 dollars in the first two weeks, then climb back up to $108 last week, and now fall back again.
The truth though, is that the initial recovery in oil seen mid month was irrational and wholly without foundation.
The Paulson plan was never going to stop recession. Without doubt, the Paulson plan would have represented the most drastic example of US government interventions since the Great Depression, but such action could only be justified if the alterative was economic catastrophe. If there really was, or indeed is, a genuine prospect of such catastrophe, then the price of oil is way, way too high.
If the panic we are witnessing on the markets, is in anyway appropriate, then oil should have collapsed by now.
But to believe that the Paulsom plan could somehow turn catastrophe into boom is naive in extreme. Yet, only the prospects of an economic boom could possibly justify the current price of oil.
The likelihood, however, is that even with a Paulson plan, or maybe with something else that is better, the US will still hit recession. The global economy will limp forward for a few years. And in that environment, demand for oil will fall significantly, which is why oil is still way too high.
The fact that black gold surged last week, once again approaching $110 just goes to show how irrational the markets have become.
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