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Investing your money - Black Gold

Written by David Burt - Investment Specialist on December 3rd, 2014.      0 comments

April 1980 and April 2011 have something in common.  In both months oil peaked at US$116[1] and then fell.  At the time of writing it is US$75[2] (US$145 in June 08).  Large movements in oil prices can have huge impacts on markets and our lives, and not just at the gas station.
 
For investors, key drivers of almost all investment-relevant prices are in inflation and interest rates.  With oil plummeting, inflation expectations are also falling (as though they were not already low).  And a low inflation outlook means interest rates will be lower than otherwise, which directly affects how markets price your investments in properties, bonds and shares.
 

Good News / Bad News

It is difficult to come up with much in the way of negatives from falling oil prices, unless you happen to be say Russia or Venezuela.  Those economies are critically dependent on their oil income. They, and even the Saudis, are likely to run a deficit below US$80 a barrel.  But elsewhere, costs get pulled back and that reduced headwind helps economic growth.
 
For some time now, equity (share) markets and properties have had a pretty good run.  The likely effect with oil well below US$100 is that these two kinds of investment markets will continue to receive support from low inflation and subdued interest rates.  Additionally, Japan and the Europeans are printing money like it’s going out of fashion, which pours more cash into the system and also supports investment (asset) prices.
 
with oil well below US$100 . . . markets will continue to receive support . . .
 
Low oil prices could have another benefit that indirectly helps investors, and that is confidence.  The world is still trying to accelerate away from the quagmire of the Global Financial Crisis and in particular the US seems to be teetering on a line between on the one hand a surprisingly strong and healthy recovery, and on the other a drawn out,  unconvincing on/off/on/off affaire that never really fires.  Sometimes, with economies, confidence can make the difference
 
If low oil prices can add some horsepower to the currently modest but hopeful US recovery, in a low inflation way, investors everywhere might still be celebrating this time next year, and the next . . . 
 
If you are not sure whether you are positioned to benefit please feel free to book a time for some conversation over coffee.
 
David Burt - david.b@alliott.co.nz
 

David is licensed by the Financial Markets Authority (FMA) as an Authorised Financial Adviser (AFA) and his Disclosure Statement is available on request, free of charge.
 
The above note is not personalised for any individual or entity.  It does not take into account your particular financial situation or goals (or any 1 or more of them).  If you act on information contained in this note the outcomes may not be what you expected nor suit your particular circumstances.  Neither David Burt nor Global Portfolios Ltd will be responsible for any loss or non-payment as a result of actions taken upon information or recommendations provided in this note.   Readers should seek investment/tax advice prior to action in relation to any of the matters discussed above.

 

[1] Inflation adjusted to 2014 dollars.
[2] WTI (West Texas Intermediate) price, the same price measure quoted in the first sentence.
 

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