Black Gold, Yellow Gold - The Connection

 |  Includes: COP, CVX, GLD, STO, WLL, XLE, XOM
by: Michael Fitzsimmons

Black gold is referred to as Texas Tea. Yellow gold is the bright shiny metal. Despite their stark difference in color, there is a very strong connection between the two which will be explained below. The investment implications of this connection are also considered.

In my last article, I took a shot at monetizing the United States' currency-in-circulation with the government's gold reserve holdings. My initial calculation neglected to take into account the Troy ounce conversion factor, but in the comment section, this was corrected and the final answer was:

1 oz gold = $1.08 trillion / 261,498,899.316 oz = $4,130.04 / oz

Both numerator and denominator were taken from the government's own reported numbers. This is obviously much higher than the current quote ($1669.60/oz) and set off a great discussion in the comment section. Even more shocking was the value derived for an ounce of gold if the U.S. were to monetize its debt and liabilities. That number was so large I hesitate to repeat it here so you must read the article for that.

Some members of the Seeking Alpha community wondered why I was only taking into account gold and not other government assets like buildings, land, the military, and natural resources like oil. This never even occurred to me. From a Constitutional perspective, "notes" should be backed by gold and silver. Perhaps the framer's believed the government would simply sell assets to purchase and store gold and silver were it necessary to do so.

However, those comments made me wonder just how much wealth, measured in gold, is leaving the country every month due to our dependence on foreign oil. Let's use July's oil import numbers to estimate how much wealth, in terms of gold ounces, the U.S. sends overseas on an annual basis.

July 2012 Oil Import Data

Barrels of Oil Imported by the U.S.: 337 million

% Imported from Foreign Countries: 58%

Money Sent Overseas: $34.6 Billion

Taking the government's numbers for oil import data (from the EIA), and the current gold bid at we have:

Gold Equivalent Sent Overseas in July 2012 = $34.6 Billion / $1669.60 /oz = 2,072,352.65 oz

For the sake of argument, let's assume July was a typical month in terms of oil imports. With that assumption, the amount of gold equivalent (GE) that will be shipped out of the country to fund our foreign oil dependency in 2012 will be:

Yearly GE Sent Overseas = 12 months * 2,072,352.65 oz/month = 24,868,231.91 oz/year

For the sake of this exercise let's assume oil prices won't rise, imports won't change dramatically, and that 2012 is a typical year. In this case, the U.S. could keep importing oil for:

Years of GE for imported oil = 261,498,899.316 oz/ 24,868,231.91 oz/year = 10.5 years

before its gold reserves would run out. That is, the U.S. could continue to import oil, at its July 2012 rate, and if it were paying market prices in gold for it, for a total of 10.5 years before depleting its entire gold reserve holdings (!). This is a fantastic realization, at least for the author. When one considers the U.S. has imported oil for at least 30 years, it's probably a good assumption that the U.S. has already effectively transferred its entire gold reserve holdings' value overseas. Amazing.

But of course the U.S. has paid for its oil import with paper dollars and Treasury notes. The U.S. government still has the gold reserves at Fort Knox. At least they say they do, and we hope it is the case... Regardless, even though the exercise was hypothetical - it was still very revealing.

In February of last year, I wrote an article explaining how oil pushes gold higher (not vice-versa). I'm still convinced this is true in a long-term macro sense. How should an investor play this long-term trend (and I stress "long-term")?

The simplest way to invest if oil prices keep rising is to buy gold and silver bullion or invest in the gold (NYSEARCA:GLD) and silver (NYSEARCA:SLV) ETFs.

An alternate strategy, of course, is to invest in energy and those companies that produce oil. Some broad energy ETFs you might consider are:

  • SPDR Energy Select Sector Fund (NYSEARCA:XLE)
  • iShares S&P Global Energy Sector Index Fund (NYSEARCA:IXC)
  • Vanguard Energy ETF (NYSEARCA:VDE)

For those who prefer to own shares directly, my favorites are the large oil companies that pay decent dividends like Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX), and ConocoPhillips (NYSE:COP). COP pays a 4.6% dividend yield and is my first choice. Statoil (NYSE:STO) is another interesting energy company that pays over 4%. STO seems to discover another massive oil reservoir every few months.

A more speculative investment, and thus potentially more rewarding, is Whiting Petroleum (NYSE:WLL), which seems significantly undervalued here at $45/share. It is also, I believe, a prime takeover candidate vis-a-vis GEO Resources and BEXP. This Reuters article recently discussed some companies operating in the Bakken for their takeover potential.

So don't forget the very real connection between oil, gold, and the financial health of the United States. That said, n investor must be very nimble these days. Let us not forget that both gold and oil investments took a plunge back in the 2008 crisis. Good luck with your investment decisions.

Disclosure: I am long COP, WLL, STO, XOM. 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.