Sell Gold, Buy Oil

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April 22, 2009 5:15pm NYSE:DBO NYSE:GLD

gold-or-oilGold is selling at a historic premium to black gold. Sell the former and buy the latter to ride the likely correction to come.

Gold futures made a rebound on April 20 as the volatile stock market triggered investors to dive into the precious metal. But they may be diving in at the high end of gold’s run, at least for now.

“The stock market got beat up pretty bad and anytime there is that kind of uncertainty, people turn to gold. Gold is, and has always been, the save haven investment.” said Patrick Lafferty, commodity trading adviser with MF Global.

At $885 an ounce, the price for gold is historically high, particularly in comparison to oil prices. Typically, it takes 10 to 15 barrels of oil to buy an ounce of gold; currently, it would take close to 20 barrels. On the flipside, an ounce of gold traded at just 4.5 barrels of oil last summer when the former was at $666 an ounce and the latter was at $147 per barrel. We all know what happened next: Oil fell sharply from its historic highs and gold rose by over $200 per ounce. Still, oil fell farther and faster than gold rose, meaning it was more overpriced than gold was underpriced……..

……..Those looking to invest here might want to consider exchange-traded funds, which track indexes but trade like stocks. For gold you could consider the SPDR Gold Trust ( GLDnews people ), which owns actual gold vs. shares in gold-related firms. Its been in operation since November 2004 and has a market capitalization of $24.4 billion, which is quite large for an ETF.

For those looking to invest in oil there are a few different options. One is the PowerShares DB Oil Fund ( DBOnews people ), an ETF that seeks to directly track the performance of crude oil. Downsides here include the ETFs small size–its market cap is just $46.3 million–and its short track record.

Or you could consider the iShares S&P Global Energy Sector ETF ( IXCnews people ), which tracks firms engaged in oil equipment and services, oil exploration and production, and oil refineries. Its been in business since November 2001 and has $524.1 million in market cap.

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