As I write this on Thursday morning, Gold is in a virtual freefall, dropping below $1400 an ounce for the first time in two years – Ben Bernanke’s statements at the FOMC meeting on Wednesday were, I think correctly, interpreted as a start to reduced Federal Reserve bond purchases and ultimate tightening in interest rates. The reaction has been swift: The Dow is off by close to 350 points in less than 24 hours, if the futures are correctly forecasting today’s action, 10-year treasuries are getting hammered, but perhaps most interestingly, Gold is by far the weakest of all. It seems the last bastion for economic diversification – one depended upon for the last 20 years as the protector of value against volatile ‘paper’ asset classes is finally releasing its grip of importance.
Yes, Gold is officially rolling over after 20 years.
What that means for oil is very important and specific. I have been a long-time proponent of hard assets as a diversifier for paper investment – although I’ve never understood the allure of the yellow metal and certainly never correctly traded it.
But I’ve done well with oil and there’s a reason I’ve found it more fathomable as a hard asset: you can burn it, and it will give you heat and energy – try that with a block of gold.
What’s occurred to me in the last several weeks as the FOMC rumor mill caused massive volatility in the stock and bond markets is that oil has remained not just steady, but amazingly so – it’s not just quietly steadied in its price, but has managed a fairly substantial rally, without much fanfare.
And that says something to this trader, who’s also always believed that the markets are the absolute arbiter of everything. Oil is acting well while gold is acting poorly in the face of paper asset market volatility –
Oil is becoming the new gold.
It’s not better than gold or a currency substitute, I don’t believe. Most of what I see happening in the oil market is a function specifically of what’s happened with gold – the yellow metal looks to me like a tired trade; it’s had an amazing run without much (really without any) retracement, it is a retail investor’s play, and therefore in the hands of fickle owners.
And everyone’s looking for the next safety play.
I don’t think that the Bernanke statements are signifying a two-year top to the stock markets, by the way. While I’ve felt that this year’s gains were stretched and recent volatility is not normally bullish, there was always the prospect of slowing Fed activity on the horizon. This was a road we were destined to cross.
But I also want to have stocks that will be able to take advantage and monetize a high price for oil that looks like it can drift higher still, even in the face of Fed tightening threats. And that means that now more than ever, you need to be in big, integrated E+P names in the space – this is a diversifier of stock that is trying to counteract the vulnerability of paper assets – like stocks.
If that doesn’t make sense immediately, it will. Because mega-cap oil names that generate a nice, steady dividend that have also underperformed miserably in a Fed-induced stock market rally are, I think, going to be the perfect place to be in the next several quarters of Fed-induced volatility of steady and rising oil prices.
Names like BP (BP) – delivering 5% and Royal Dutch Shell (RDS.A) – delivering 4.7%
Because oil is the new gold.