ETF Update: Use Oil, Gold ETFs to Offset Gas Price Increases

Oil, the Dollar and Gold ETFs Are Working Together

Slight upticks in the dollar against the euro this week may be in sync with investors timing their re-entry into the market and ETFs.

On Thursday, the U.S. dollar was up to an eight-week high against the euro in overseas trading, with the speculation of a possible slowdown in Europe that will allow the European Central Bank to cut rates, reports Peter A. Grant for GoldSeek. The dollar seems to be contained against two other major currencies, the Japanese yen and Swiss franc.

All the while gold has kept a solid stance, and oil is only heading higher lately with the newest record high reached on Friday: $126.20.

The streetTacks Gold Shares (GLD) has been turning around with positive performance in the last week, up 3.4% in that period. As long as oil continues to rise in price, it's believed that gold should continue rising along with it.

When the Price of Oil Goes Crazy, What Happens to the ETFs?

We all know how oil futures and ETFs that contain them operate. But if you've ever wondered if the markets could ever "stop the madness" that is the rising price of oil, the answer is "kind of."

The New York Mercantile Exchange [NYMEX] has circuit breakers in place when prices move by $10 in either direction for all months. If any contract is traded, bid or offered at the $10 limit, trading is halted for five minutes to allow traders to regroup. When it resumes, a new $10 limit is put in place and if that's reached, trading halts for another five minutes, and so on.

So, it's possible for oil to gain or lose $30 or even more in a day, but the five-minute breaks cool things off a bit before they pick up again.

It's likely trading in ETFs that contain oil futures would halt for five minutes as well. At the very least, the bid/ask of those ETFs would widen out in those five minutes because market makers wouldn't have a "live" price to use.

Using Energy ETFs To Offset Gas and Oil Prices

Frenzy in the energy sector has reached a fever pitch, but are ETFs that allow investors to hedge those prices necessarily a great idea?

The summer driving season is going to kick off soon, but with the way things are going, who can afford it? Oil passed $126 a barrel on Friday, while gas rose to more than an average of $3.67, reports John Wilen for the Associated Press.

Oil's price spike came after concerns about Venezuelan President Hugo Chavez's ties with rebels who are threatening to overthrow Colombia's government. It may raise chances the the United States will impose sanctions on one of its largest oil suppliers, and Chavez might then cut off our supply.

Many investors have been looking at situations like this and wondering how they can lock in the lower prices and profit from the price hikes. ETFs that hold oil and gas futures are designed to rise in value at the same time their underlying commodities are going up in price, reports Rob Wherry for Smart Money.

Natural gas has benefited from the fear that supply and inventory issues will push crude-oil prices even higher as well, says John Spence for MarketWatch. ETFs like U.S. Natural Gas Fund (UNG), up 50.1% year-to-date, has also served as a means for investors to hedge their exposure to energy.

With all this good energy flowing around the markets, a new alternative energy ETF has been launched. The Claymore/Mac Global Solar Energy Index (TAN) debuted on April 15, and has lured plenty of interest. Steve Gelsi for MarketWatch says this has been the second-fastest growing ETF from Claymore thus far. The TAN index invests in 25 companies chosen under the MAC Global Energy Index. The fund is up 0.2% since its launch.

The one hindrance to hedging is that the people who need the hedge most might be among the least likely to actually have the cash on hand to do it. And then there's the matter of the tax bill if a profit is made.

You can't forget the volatility of the energy market, either. It's prone to wild swings in either directions, and some suspect it's a bubble that's ready to burst.

This feeding frenzy in energy ETFs means that the more people who buy, the more the price goes up. It's hard to know where the speculation on rising prices ends and natural demand begins.

But if you look throughout history, whenever there's been a major bull trend, people will inevitably say it's a bubble. That may very well be the case with oil, too. But it could also go up another 50%-100% before that happens.

Don't fight the trend. But have your stop loss in place if the bubble does burst.

Other funds that trade energy futures are:

• United States Oil (USO), up 32.8% year-to-date
• United States Gasoline (UGA), up 17.3% since Feb. 28 inception

Comments

[OJO Zafado]

As in a previous alpha alert it is explained that owning these Futures trade or commodity funds may at year end have some onerous tax consequences. I think if you are trying to create a hedge against oil prices for paying for your rising personal gasoline and heating oil/Nat Gas costs you would do better investing in O&G trusts. PBT,CRT,SJT(San Juan?).BPT and NGT. While there are the vagaries of the foreign tax situation the Canadian Trusts for the most part remain undervalued. It is the tax cloud hanging over them that makes them the value they are. The BTE is screaming higher, the PVX and PWE remain true "value plays" in the sector,while crack spreads remain problematic for HTE. It is in great shape to rebound if there are indeed gasoline shortages do develop in the summer months. PGH with very large reserves is chugging along and should continue to reflect the market. Along with BTE, AAV are both prime candidates for aqcusition by larger entities like ERF or PWE. Many of these are getting involved in oilsands projects. These are not great investment for trust owners as they have long lead times to producing accretive cash flows. ERF is one I would avoid on that basis. It is a long term soundly run trust but... Of some interest is the ETF ENY which has a rotational platform strategy to be invested in oil sands for the most part but also under certain market conditions rotate out into the O&G trusts. The dividend s in that one seem to vanish down a rabbit hole. Anyone have a thought on that? Nearly all these trusts in Canada pay out tax advanged/qualified dividends. That is a vagary as well in terms of future US tax laws. The foreign tax credit that is now allowed on these trusts' witholdings may be reduced or eliminated as well. The US Dollar is in the strengthening mode we are told by the talking heads. Owning the Loonie assets in a country very uncomfortable with the erosion of it's current accounts SURPLUS down to $3billion dollars may not be all that risky. These trusts mostly pay monthly income streams that if you use a separate credit card to pay for your gasoline with you can apply it directly to the monthly bill. The US dollar can only have a short lived rally with the Gov't and the 2 year politicians commited to inflating the nation out of the collapsed economic model built on a foundation of personal, town & city,County,State and Federal Gov't debt. The shoes continued to drop in Europe this week with more major banks and financials writing down huge losses. Soc Gen, Fortis and Credit Agricole were amoung the usual suspects fessing up to billions more in losses. Meanwhile C and Deutsche banks were trying to pawn off some of their Leverasged buyout debt on a european Warren Buffet type "guy". It seems Guy Hands of Terra Capital found their offers to sell this junk not to his likeing for lack of an "adequate risk return" Also from over the pond they are shaking the LIBOR trees again. Shocked!, shocked! we are to find LIBOR numbers, 2.68% for 3 months to be not "quite right"! I say...! Not to worry Ben the Dollar Slayer floated out a doubling of the TRCA last week to the ECB and SNB to the tune of $100 billion. So the Europeans now have lots of liquidity to deal with the problems we exported to them in the first place. Mean while the developing nations most of which receive US forein aid continue to subsdise the price of gasoline to their consummers. We give Egypt $1,7 Billion a year in aid so they can indirectly subsidise the price of gasoline @ $0.90/gal. Pay no attention to the men behind the curtains

[wayneS]

Credit card companies are the only ones with increasing profits from rising gasoline prices.
They get a set percentage of the total price of gasoline.
More people will be using credit cards to buy gasoline.
More people will be paying late fees.
More people's interest on balance will be raised.
There is no risk and short term profit from stocks.