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Is Oil The New “Gold Standard”

oil and goldKent Moors: Something very interesting just happened at the 2013 MoneyShow in Las Vegas.

The purveyors of doom and gloom were all still hawking their services there. But the primary solution they offer – a cure-all elixir for everything that ails markets – was beginning to wear thin.

The usual conviction that this one asset is the remedy was gone. And the seats at these sessions were only half-filled.


Indeed, gold is beginning to lose its luster.

The erstwhile commodity fix has been under pressure of late as well. Yet, even while most eyes have been on declining commodities – especially gold, silver, and platinum – something else has been happening.

Crude oil is emerging as a new replacement to reflect stored market value.

That is good for folks like us who invest in the energy sector, because it will provide a floor to downward pressures in oil prices. It will not counter all forces reducing the price of oil, but it is likely to temper such movements, allowing us some leverage.

Take a look…

The Yellow Metal’s Fall from Grace

Before 2013, the reliance upon metals as a value play during volatile trading periods has become almost a mantra. Such commodities are usually regarded as barometers for broader market moves, although the precipitous fall in pricing over the past month has called that position into question.

That fall has been considerable.

SPDR Gold Shares (NYSEARCA:GLD), the most widely held gold exchange traded fund (ETF), has fallen 15.3% since April 1. Meanwhile, the equivalent for silver – theiShares Silver Trust (NYSEARCA:SLV) – is down 21%. ETFS Physical Platinum Shares(NYSEARCA:PPLT), the most popular platinum ETF, is the best performing of the three, but it’s still down 8.8% since April 1.

Normally, gold is regarded as the primary refuge when markets move south, with silver regarded as a distant second. Both silver and platinum are also regarded as indicators of market improvement (along with copper, a commodity I have long regarded as an “acquired taste” largely dependent these days upon Chinese industrial performance).

What has been happening recently, however, is different. GLD and SLV have declined far more than the overall market has risen. In other words, a cursory view would immediately show that what is happening is way more than the commonly perceived negative side of the “flight to security.”

That is, if gold (and to a lesser extent silver) are seen only as a refuge when things so sour, the reverse move of the market up should cause interest in the metal to decline.

The current slide, however, is well beyond the rise in market prices. As of Monday,  the S&P had risen 6.7% since April 1, less than half the fall in GLD and only a third of SLV.

With the much announced sales of gold holdings by investors like George Soros and Warren Buffett, the largest slide in some three decades has put the metal’s position as a further market barometer in doubt.

At the same time, the price of crude oil has become a more accurate reflection of where markets are moving.

Why Oil’s the Better Market Indicator Today

As of Monday, West Texas Intermediate (WTI), the NYMEX benchmark futures contract crude rate, has declined less than 1% since April 1, but has risen 7.7% over the past month, better than the 5.6% improvement in the S&P.

Yet this is not translating into a similar result for Brent, the London-based benchmark comprising the other primary crude oil standards worldwide. There, the price has declined 6.6% since April 1, although rising 3.5% for the most recent month.

Now the focus between these two has fallen upon the “spread” or  the difference in price. In every trading session since mid-August 2010, Brent has been priced higher than WTI. Both of the benchmarks have lower sulfur content than some 85% of the oil traded globally on a daily basis while WTI is a slightly better grade than Brent.

Nonetheless, Brent has been trading at a premium to WTI.

One reason has been the glut of volume at Cushing, Okla. (the primary pipeline location in the U.S. and the place where NYMEX sets its WTI daily price). Another is the usage of Brent as a yardstick for more actual oil sales internationally than WTI.

The surplus at Cushing is now being reduced due to a reverse flow on an existing pipeline to Gulf Coast area refineries and the prospects moving forward from new transport networks. Meanwhile, Brent is experiencing added competition from new sour (i.e., higher sulfur content) crude benchmarks rates in determining trading prices.

When combined with additional American domestic oil coming on line, the spread is narrowing. As of Monday, it stands at 8.1% of the WTI price (the better way of measuring the actual spread’s impact on the U.S. market). It was discounted almost 23% less than three months ago.

This contraction of the spread will have some interesting benefits for energy traders moving forward and we will discuss these in an upcoming article. But it is also related to the matter we are considering today.

As that spread narrows, WTI becomes a more ready reflection of actual global oil prices. And as the premium returns to New York traded oil, we will also acquire a more ready indicator of crude’s rising position as a store of market value.

There are a range of interesting outcomes for the energy investor from this development. While the average investor is not about to begin trading in oil futures, there are several ETFs that would accomplish the same objective.

Using select ETFs to target individual company shares will also result in increased trading leverage.

I will have much more to say about this once the revised oil position settles.

Money MorningWritten By Kent Moors From Money Morning

We’re in the midst of the greatest investing boom in almost 60 years. And rest assured – this boom is not about to end anytime soon. You see, the flattening of the world continues to spawn new markets worth trillions of dollars; new customers that measure in the billions; an insatiable global demand for basic resources that’s growing exponentially; and a technological revolution even in the most distant markets on the planet.And Money Morning is here to help investors profit handsomely on this seismic shift in the global economy. In fact, we believe this is where the only real fortunes will be made in the months and years to come.


NYSE:GLD, NYSE:SLV, NYSE:USO


 

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  1. Craig
    June 3rd, 2013 at 17:45 | #1

    Kent, I’m curious if you can explain why, on 5/30/13, etf SCO dropped 2% on the same day UCO dropped 8% (when they are supposed to move inversely?)

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