Gold and Oil Part Company

By Brad Zigler

Real-time Monetary Inflation (last 12-months): 1.8%*

Gold aficionados are feeling pretty good now. COMEX spot gold seems to have definitively broken out of its trading range to clear its February high above the $1,000-mark. Where the gold market goes from here is now topic No. 1 in chat rooms and cocktail parties. Some folks that followed the trading tactic we illustrated ("Good Times For Gold Traders" and "Has Gold Finally Broken Out?") are no doubt contributing to the palaver.

(If you're wondering what those December $1,000 calls are now worth, they settled at $48.50 on Friday, more than doubling their value since they were first highlighted on August 27).

Investors in that other bellwether of inflation, crude oil, are poking rather sullenly at the cheese cubes now. Black gold languished while the yellow stuff spiked higher in September. For the month, the nearby NYMEX crude contract's yielded a -6.8% return on margin while spot COMEX gold made 52.9% for longs.

That gold seems directional and oil range-bound is really no wonder. The gold and oil markets' populations are wildly different in their approach. Oil's a professional trader's playground and most of the games being played now are spreads, not directional trades. Among money managers, spread trades outnumber directional positions nearly 2-to-1. For swap dealers, the spread advantage is 3-to-1 and for large noninstitutional speculators, it's better than 5-to-1. Clearly, the big guys are playing small ball in the oil ring.

Over in the gold pit, traders are swinging for the fences. Money managers favor outright trades 4-to-1 over spreads. Swap dealers have laid on three times as many directional trades as spreads. Only among large private specs are things more evenly matched.

Much of the disparity between the two commodities is contango-related. This year, oil's back-month premium has shrunk, creating a bull spreader's paradise. A three-month roll was worth more than $15 a barrel back in January; now, it's just north of a buck. This is no news to owners of the United States 12-Month Oil Fund (NYSE Arca: USL), who've seen ground being lost to backwardation-loving sibling United States Oil Fund (NYSE Arca: USO) over the past month.

The parting of the ways between yellow and gold is best reflected in the gold/oil ratio, which has pulled up from its nosedive to break above 14-to-1 again.

In July, the ratio's slide reversed only to hit a hard ceiling at 15.5-to-1. Seasonal factors now are playing more to gold's favor, but we'll have to wait and see if the yellow metal can find clear skies above.

Gold/Oil Ratio

*Note: The monetary inflation rate is calculated daily and represents the change in our proprietary index over the last 12 months. We update long-term inflation in real time as well. Since 1999, the compound annual growth rate in our index is 5.3%.

Comments

[redbaron:]

What happens when you add natural gas to the mix? NG has had a nice move the last couple of weeks, and most oil producers also produce NG, so one could guess that if NG was somehow considered as an addition to oil, if the trend would be as obvious. Is there a way to chart oil plus NG against gold? I'm not sure how to do this, but am sure some statistical guru could figure this out quickly.

I invest only in stocks, so while the commodity trends are interesting, they don't tell the whole story for me.

Sep 14 04:38 PM

[BullnBear:]

I suppose that we aren’t going to have a debate anytime soon about gold regulation but oil…. now that’s another story and I believe that is what’s holding back the energy complex at the moment including that pesky economy thing that keeps popping up as well as the weak dollar.

Gold is being talked about everywhere which I find a bit odd, the stories about China hording gold, fiat currency collapse, etc. seem to be running wild at the moment.

I don’t know what is going to happen but as I’ve stated before I believe that gold is great for a holding, (I don’t own any gold currently), but when things calm down I believe that I would just stick with oil.

Sep 14 04:42 PM

[Mayer Amsch...:]

I like how "cetinsucks" was followed two posts later... by Cetin himself, spamming away as usual.

Sep 15 01:13 PM