Gold has skyrocketed and oil has dropped like a rock in the last few months, in case you were in a closet.
Here's why I am long oil (NYSEARCA:USO) and am getting longer on dips:
- Oil has come down about almost 80% from its high. (I understand that there was overbuying because JP Morgan (NYSE:JPM) was highly leveraged and was technically manipulating the market, but it worked for a reason.)
- Oil is a commodity just like Gold and Silver, making it an international currency.
- The Federal Reserve Bank is leveraged 75:1.
- The U.S. government is 53 trillion in debt, according to our former comptroller.
- The US GDP ranks 177 out of 181 countries.
- The US government currently spends all of the $4 trillion it makes annually and more, making the $53 trillion unlikely to get paid anytime soon.
- The US used to be the reserve currency of the world. Right now there isn't one. People are confused as to where they can put their money, and the US is currently being used because the next best thing hasn't been figured out yet. It certainly won't be the euro or the pound. They are both in similar positions.
- Oil is an international currency which will hedge against the dollar, in the case of the dollar devaluation the US government is currently setting up.
- Oil is consumed, whereas every ounce of gold ever mined is still on earth (unless it was forcibly changed into something else, which is unlikely).
- Even if the demand for oil doesn't come back it is not feasible to extract it using more expensive methods at these prices, which means that production will be decreasing more and more as it gets cheaper.
- The general consensus is that it's too cheap right now. How do we know this? Instead of selling oil to the general market, the new trend is to rent tankers and store it. It is relatively cheap to rent a tanker compared to how much can be made by holding it until it is at more reasonable levels.
- The only real threat to oil is a renewable energy source that will replace it or a cleaner burning method. This is highly possible, but the widespread application of it will not happen anytime soon. Even in the case of a replacement found for cars, it is used for many more things other than gasoline. It is used for plastics and other similar consumer products. It is hard to find something now that doesn't have some plastic in it.
Overall, oil could definitely go lower, to a certain point. But even if the market dies and the dow hits 0, this will negatively affect the dollar, which will then spike oil. But I am in it for the long haul, and am willing to wait it out. I was right about gold (NYSEARCA:GLD) and silver (NYSEARCA:SLV), and see oil as the next logical move because gold and silver are starting to get pricey. If I was going to invest in gold or silver it would be physically. I can't exactly store oil - otherwise I would.
There are those that would criticize this play on the basis that any commodity is eligible for this argument. Copper is an example. You might be right. So get any commodity you like. I like oil, for the reasons above.
Disclosure: Long USO.