|
Oil Stocks are likely to outperform Gold
Stocks over the next 6-months which should provide further support to the
stock market.
A question I get asked a lot is where
should I be investing my money?
"I'm a believer in the Commodity
Super-cycle and in Peak Oil but gosh, just tell me what (and when) I should
be buying!"
For us the question really boils down to
allocating between Precious Metals, Energy and Industrial Metals. In this
article I want to explore the Gold Stock vs. Oil Stock relationship to see
how we should position ourselves for the remainder of the year and what (if
any) inferences we can make on the general market.
Under normal financial conditions i.e.
where liquidity and carry trades don't dominate, Oil stocks tend to benefit
from strong economic growth and Gold Stocks tend to benefit from a weak
economy. That is, Central banks pursue inflationary monetary policy in
response to weak economic conditions which is positive for Gold. Therefore,
an analysis of Gold Stocks vs. Oil Stocks should give us an indication as to
whether economic growth is strong or weak.
Chart 1 - Gold Stocks vs. Oil Stocks still consolidating
From late-2000 to 2003 Gold Stocks
dominated Oil Stocks. This was the last serious Bear market - the Nasdaq crashed over 80% and the Fed slashed interest
rates to 1% in order to stimulate the economy.
As monetary stimulus took hold in 2004
the BRIC (Brazil, Russia, India,
China)
theme began to emerge, Oil Stocks (and the Stock market in general) began a
2-year rally into late-2005 (the chart fell).
This was followed by some minor
corrective action (to mid-2006 - upper green line) and since then Oil Stocks
have onbalance outperformed Gold Stocks.
From a purely technical point of view,
chart 1 indicates that Oil Stocks should continue to outperform Gold Stocks
for the remainder of the year until the ratio reaches support at 0.20.
As noted in a previous article called Good Oil Stocks bad Oil,
oil stocks are not directly correlated to the price of Crude but tend to
follow along with the general trend of the market. We suspect this has to do
with the fact that Oil companies are large components of the S&P500 and
hence beneficiaries of the ton of money flowing into index trades.
We also noted in the above article that
periods of out performance by Crude vs. Oil Stocks are generally associated
with a weakening stock market. Following on that analysis, we note that the
Amex Oil Stock Index has just formed a double top pattern against Crude.
Chart 2 - Oil Stocks have formed a double top against Crude Oil
So what does this mean?
It means that Oil Stocks (and by
inference the stock market in general) will remain soggy through the summer
(Gold and Gold Stocks should bounce back from oversold positions). However,
based on the fact that Oil Stocks will outperform Gold stocks over the next
6-9 months (chart 1), it is unlikely we will see a significant correction in
stocks this year.
Make no mistake, Gold stocks are in a
long-term secular bull market and MUST have a weighting in your portfolio. However,
and as impossible as it may seem, the growth theme looks like it has further
to go.
Here is further evidence that Gold
Stocks will under perform against Oil Stocks:
Chart 3 - Gold price pulling back from H&S neckline vs. Crude Oil
Whilst the correlation between Crude Oil
and Oil Stocks can be a little iffy, the correlation between Gold Stocks and
Gold Bullion is more dependable.
We have been watching the above Head and
Shoulders formation for a while to see whether Gold would break out against
Oil. What happens all too often with H&S patterns is that the breakout
fails to materialize and the price backs away from the neckline in a hurry!
That's exactly what happened here and
the implication is that Crude will outperform Gold Bullion for the
foreseeable future and by correlation; Gold Stocks which are highly
correlated with the Gold Price will lag.
Crude Oil has recently completed a
breakout above a 9-month Head & Shoulders formation forecasting $80 Oil. And
whilst Oil Stocks look extended, the above analysis indicates there is more
upside in store (chart 1). Therefore higher Oil prices should be supportive
of higher Oil Stock prices which should in turn should
cause them to outperform gold stocks.
For now we favour energy stocks over
Gold stocks and we are looking to put new money to work in the stocks of
Oil and Natural Gas Producers and Drillers who are basically printing
money with energy prices at these levels.
More commentary and stock picks follow for
subscribers...
Greg Silberman
CA(SA), CFA
greg@goldandoilstocks.com
I am an investor
and newsletter writer specializing in Junior Mining and Energy Stocks. Please
visit my website for more free articles and analysis
Click here: http://blog.goldandoilstocks.com
This article is
intended solely for information purposes. The opinions are those of the author only. Please conduct further research and
consult your financial advisor before making any investment/trading decision.
No responsibility can be accepted for losses that may result as a consequence
of trading on the basis of this analysis.
Information contained
herein is obtained from sources believed to be reliable, but its accuracy
cannot be guaranteed. It is not intended to constitute individual investment
advice and is not designed to meet your personal financial situation. The
opinions expressed herein are those of the author
and are subject to change without notice. The information herein may become
outdated and there is no obligation to update any such information. The author, 24hGold, entities in which they have an
interest, family and associates may from time to time have positions in the
securities or commodities discussed. No part of this publication can be
reproduced without the written consent of the author.
|
