Managing Editor

A Chart From Our Anxiety Closet

OIL is an exchange-traded note that provides LONG exposure to crude. You'd need to SHORT the note for the gold/oil ratio trade.

A Chart From Our Anxiety Closet

Amplification: Short crude exposure CAN be obtained through other vehicles. The PowerShares DB Short Crude Oil exchange-traded notes (SZO for -100% exposure to the Deutsche Bank Liquid Commodity Index – Optimum Yield Oil, DTO for -200% exposure), however, convey credit risk as they are unsecured debentures of Deutsche Bank AG's London branch. The MacroShares portfolios, made of up Treasuries and repos, don't impart such exposure, no do they directly rely upon oil futures.

Test-Driving Some Exchange-Traded Oil Vehicles

Given the current volatility of spot futures, there's a 2% probability of oil rising above UOY's/DOY's upside trigger of $185 per barrel by year's end. The probability of crude punching through the $15-a-barrel downside threshold in that same time frame is statistically zero.

I'd say those are pretty good odds for a DOY play.

Gold vs. Oil

bearfund -

You're right, of course, about MacroShares' price variance from oil. That's, in fact, the point of the piece: turning an investment lemon into lemonade. We're USING, instead of simply DECRYING, this characteristic.

DOY's tracking error is a boon for the short-minded trader in this case because it creates, unintended though it may be, a leveraged return.

The premium and discount reflected in UOY and DOY prices are the costs of the embedded options discussed in "Accounting for MacroShares Premia/Discounts" (www.hardassetsinvestor...).