Gold vs. Oil: Gold Is Winning

By Brad Zigler

Real-time Inflation Indicator (per annum): 7.8%

It's hard to find winners in today's market, especially if you don't want to use margin. You pretty much have to write off futures unless you're willing to plunk down the total contract value up front. Even a mini gold contract would set you back about $24,000 (see how investors wanting precious metals deliveries are buying through futures in "Precious Metals: ‘I Can Get It For You Wholesale'").

There are exchange-traded funds, notes and grantor trusts, but gains in the commodities-based products have largely been limited to a handful of short, or inverse, trackers recently. Take the PowerShares DB Double Short Oil ETN (NYSE Arca: DTO), for example. Since its June launch, the note has provided twice the inverse daily return of its underlying index which tracks NYMEX oil futures. Timing couldn't have been much better for DTO's launch. Not long after its first trading day, crude began tumbling. As a result, DTO garnered a 339% gain.

Crude oil's sell-off Thursday was extended in overnight trading, putting the near-term downside objective of $46, basis the NYMEX December contract, in view. Though technically oversold, there's been very little support for this market since a measuring rally failed back in September.

NYMEX Spot Crude Oil Futures

Oil's break below the $50 mark sent the gold/oil ratio screaming to the 15-to-1 level, tipping the indicator further in the "recession" direction. Technically, the ratio looks like it's aiming for the 17-to-1 level now.

Gold/Oil Ratio

That means there's still a likelihood of continuing weakness in oil or relative strength in gold. To be sure, gold hasn't been a winner this fall. In fact, since the launch of the DTO note, COMEX spot gold's fallen 15% in price. Still, that's a lot less than the contemporaneous 64% decline in the NYMEX spot crude contract.

COMEX Spot Gold Futures

Investors could, of course, just buy DTO, but with an annualized volatility of 85%, that could be scary. Trading the gold/oil ratio, however, could be intriguing (of course, it would have been really intriguing for those prescient enough to recognize the opportunity back in July when the ratio cratered below 7-to-1).

There's an exchange-traded note, the PowerShares DB Double Long Gold ETN (NYSE Arca: DGP), that matches DTO's volatility. Buying both ETNs in a 1:1 ratio back in June would have generated a 167% net gain with a third less risk than the outright oil note.

Gold/Oil Ratio - ETN Version

Trading the ratio today, however, might require a ratio adjustment to compensate for price changes in the two notes. We'll examine that in Monday's column.