Missed the Move in Gold? Crude Oil Could Be an Alternative Commodity Play

Not everything that glitters is always gold and capital always seeks to take advantage of the safest and cheapest place for a home. It is for this reason the markets are constantly dynamic.

We know that capital has been fleeing the U.S. dollar due to secular monetary policies and unsustainable levels of debt. Some of this capital has been shifted to commodities and gold is one in particular that has been attracting a disproportionate share of investor interest. Recently, I wrote a report on the long gold trade being potentially overcrowded and while I also still acknowledge that the dollar is oversold, my investment bias towards it remains neutral.

Today, let us examine another commodity, crude oil, and its performance relationship to gold. Weekly chart analysis (see Chart #1 below) compares the price movement of oil to gold and reveals a change in relative strength. The downtrend and resistance levels for "oil vs. gold" have been broken while the downward momentum for this price relationship has also decelerated. Stochastics are also flashing bullish signals as they turn upward.

Chart #1

For investors who have been long gold and considering some profit-taking or diversifying their commodity exposure, or even others who may have missed the move in gold, crude oil could represent a potential alternative commodity play for U.S. dollar "player haters". On Thursday, crude oil made a very important breakout which is depicted on a weekly chart (see Chart #2 below). Again, I reiterate the bullish implications for oil.

Chart #2

There are a couple ways of playing a long bet on oil through the use of ETFs (exchange traded funds). The most obvious is simply going long the USO (United States Oil Fund ETF). However, for a safer strategy, one might also consider going long the USO and short the GLD (Gold Trust ETF) or to minimize capital risk exposure, buying a call (bullish) on the USO and a put (bearish) on the GLD.

Disclosures: Hillbent.com, Inc. or its affiliates may own positions in the equities mentioned in our reports. We do not receive any compensation from any of the companies covered in our reports.

Comments

[mbkelly75]

I am not sure I would do this particular pair trade, but using puts and calls is probably the safest way to do it. Thanks for the ideas.

2009 Oct 16 04:37 PM

[J Clinton Hill]

i agree with you & actually i would only do this trade with options as i suggested... however, i'm not sure about the trading experience & background of some readers, so i wanted to get the concept across first...

my teaching skills could use a little help...

thanks for your comments... i think they are most useful to readers...


On Oct 16 04:37 PM mbkelly75 wrote:

> I am not sure I would do this particular pair trade, but using puts
> and calls is probably the safest way to do it. Thanks for the ideas.

2009 Oct 16 10:55 PM

[Andrew D]

The problem of this argument is that oil is already expensive compared with gold. Apparently, oil's rise underlines the "hope" of economic recovery while gold is actual rising steadily based on dollar weakness.

There has been scarce evidence of oil consumption recovery, if at all.

Geopolitical issues may have an effect, but how much is yet to see. Saudi has extra capacity of 2 million barrels a day, which will fill the entire gap of Iran's output. Nigeria's unrest is a wild card, but the impact should be minimum.

There is replacement of oil, while gold lacks that. The green energy industry may not take over the oil dominance in the near future, however, anything is possible in several years. Five years ago, electric cars were only a concept. Green energy will have to become cheaper for wider adoption. Remember "cheaper" is a relative term. Once people start to use solar to power their house, to use battery for their cars, and to use more natural gas domestically, they are not going back. OPEC knows that; they will fight the balance of reasonably high price and risk of switch to other energy sources. $70 oil is "not bad at all", per Kuwait oil minister in August; $80? maybe a little higher.

2009 Oct 17 10:58 AM

[CoinMiner]

Hi, I like paired trades myself.

One thing not yet noted here, however, is that much of the GLD rise has been underpinned by physical Au purchases. China, India and other asian and mid-east countries have been strong buyers of physical gold for the past couple years.

This forces up the paper price, and GLD - which must maintain a certain level of physical gold in storage (at least according to their prospectus) - must then purchase even more physical gold.

You can verify this thesis by noting the premium that physical gold, especially small fractional gold pieces, has held over the spot price the past 12 months (although the premium has backed off recently).

*Extremely few organizations or banks or individuals hold physical oil.*

p.s. I like your web site.

2009 Oct 17 01:01 PM