The Price Of Oil Is Rising? Gold Is Next

| About: SPDR Gold (GLD)


In this article, I will discuss a method I have uncovered for profiting from the run-up in oil prices.

This strategy is based around a lagged correlation between the price of oil and gold.

I will discuss the specifics of the correlation, such as the length of time you should stay in gold and why now is the perfect time to use this.

With oil prices jumping more than 100% over the last months, you may be searching for a way to take advantage of the sudden shift in the commodities market. I certainly was, and, after searching through market studies on the oil markets, I believe I've found one. There is a connection between the oil and gold markets which has created the perfect opportunity to profit from the oil reversal.

According to a 2011 study, oil can help to predict the future price of gold for up to 3 months into the future. There are at least two different methods by which this occurs. The first is an anticipated effect that you may be familiar with.

Oil, and its related products: gasoline, jet fuel, petrochemicals, etc., are essential parts of a vast array of activities we all engage in on a daily basis. Because of this, oil has become a major input into our economies. So, as the price of oil fluctuates, our economies can be seriously affected. Specifically, rising or falling oil prices can lead to stronger or weaker inflation throughout.

Gold, though, is often considered an "inflation-hedge;" it retains its inflation-adjusted value. So, when prices rise or fall, as they may from changing oil prices, the price of gold also tends to rise or fall.

I'm sure you can see where this is going: when oil prices change, the effects on inflation also tend to cause the price of gold to change. This "inflation channel" was found to have a significant effect on the price of gold. Further, the effect is delayed just as inflation lags behind the price of oil.

This predictive power of oil prices over gold prices is effective up to 2-3 months into the future. However, the predictive power weakens throughout this time, until the 2-3 month horizon where it is no longer effective.

Luckily, the price of oil has been skyrocketing over the last month. We still have plenty of time to get in on the action. Of course, if oil prices fall from here, that would be a negative for gold prices. Given the dramatic rise in oil, though, I think it is safe to say the price of gold should rise even if oil falls back a little from here.

Assuming that the price of oil doesn't change drastically in the next few months, I would expect the price of gold to be in an uptrend at least until the end of June. You can invest in this in a few different ways. Obviously, you could go the route of buying gold futures or options. Another possibility is to invest in gold-mining companies, although I wouldn't recommend this strategy as mining companies are much less sensitive to short and medium-term price movements than one might think.

I, not being a futures or options trader, have opened a long position in the (NYSEARCA:GLD) ETF. This ETF aims to track the movement of gold after an annual management fee of 0.4%. The fund holds redeemable physical gold. Because of this, it should track the price of gold extremely well over the timeframe of this investment.

Disclosure: I am/we are long GLD.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.