Sell Gold, Buy Oil

Author: Stephanie Dahle

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.

A similar reading of today's tea leaves has some people saying that despite being a safe haven, gold may still be on the expensive side.

"Long term it's still very bullish. Near term, it is a little high. Personally, I think gold has a ways to go," said Lafferty. "We're patiently waiting for the opportunity to buy gold. $820-$800 is the ideal number we're waiting for. That could change if there are any other fundamental changes."

That doesn't stop Lafferty from cautioning about possible inflation and pointing out that gold will be particularly safe in that environment. Still, there are other commodities that might be a bargain right now.

"From the standpoint of diversification, if you're able to get into the crude oil market below $45/barrel, I think you stand an excellent chance to make money on it. We think it will come back into the $70-80 barrel, in a 12- to 18-month range."

Bernie McSherry, Forbes Investor Team member and the senior vice president of Cuttone&Co., said that gold may indeed be a bit pricey at the moment, but that oil prices would rebound. Fellow FIT member Gerard Klingman, president of Klingman Associates, agreed that commodities are a good place to invest, but that diversification is key.

Ron Sloan, senior portfolio manager with Invesco AIM, agrees that gold has been a good deflationary hedge, but oil's low price makes it more attractive.

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 ( GLD - news - 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 ( DBO - news - 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 ( IXC - news - 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.

Sell Gold, Buy Oil

Forbes: Gold is trading at around $885 an ounce. And at that price, it's priced at around 20 barrels of oil, which is historically high. Does this mean gold's really out of whack and oil's really cheap? Does this mean oil's going to come up a lot? Should one buy oil and short gold? Should one buy gold and buy oil?

Gerard Klingman: You're right to separate the question. The first question we talk to with clients is whether or not we think that the result of all these programs the government has put forth to get us out of this financial crisis or recession could lead, at some point, to greater inflation. And I think there is, with the debt that's going to be created in this process that, you know, we believe that there could be significant amounts of additional inflation going out a year or two or three.

Which is a much better alternative than deflation, but still an issue. In that scenario, you do want to have commodities and real assets as part of your investment portfolio. So, we think there's a place in clients' portfolios for real assets and commodities. Then you get to the second issue of how do you play that?

And we personally think that because gold tends to, when there's a lot of fear in the world and it's a simple way to get exposure to that, that gold has gotten, we think, relative to other commodities is a little bit of a speculative bubble. So, we're encouraging more broad-based exposures to commodities, including gold, but as compared to just investing in gold.

Forbes: Where else should they look in addition to gold? What are other places to look?

Klingman: There's baskets of commodities, and whether it's through an exchange-traded fund or other ways to do it, where you're going to own not only gold but oil and copper and aluminum and silver and even agricultural commodities. All things that would, we think, be assets you'd want to own in an inflationary environment, as opposed to just gold.

Bernie McSherry: Yeah, I agree. And I think, you know, as economic recovery starts percolating through the world, hopefully soon, oil should recover. And we should see some upward movement in oil. Maybe not overnight, but over the next several months to a year, I think you'll see a little bit of an uptick in oil. So, I'd be hanging on for that. And I do agree that I think gold is overpriced.

Forbes: Ron, I would love to get your thoughts on this very subject.

Ron Sloan: Well, I think that the current disparity is a function of not necessarily hedging for inflation, which I agree with Bernie and Gerry that neither commodity, gold and oil, would be good inflationary hedges. But I think the disparity right now is a function of people looking to gold in a deflationary safety security environment. And I'm not so sure, historically, that gold has been a good deflationary hedge, especially if you look back to the '30s.

So, I think that right now, the disparity is probably not deserved. And I would agree that, you know, I think that probably there are some risks to an inflationary cycle. And therefore, the interest in oil to close that gap is probably a good one.

Forbes: OK. So, verdict--gold might be a little pricey. That's what I'm hearing.

McSherry: Sounds like we're all on the same page on that one.