Is Gold closely correlated with Oil?

[rocketdog]

I just read an article on Seeking Alpha that claims oil has historically been closely correlated with gold:

http://seekingalpha.com/article/1201211 ... -revisited

Any thoughts on this?  Might a small holding of oil stocks be a good choice for the VP if we're using it to try and get PP-like performance while also diversifying by using different asset classes? 

[moda0306]

There problem with industrial commodities is their behavior during financial crises.  I'm not saying they can't outperform gold, but since gold's driver has shown to be almost solely real interest rates, it fits very well into a financial portfolio that may or may not be losing to inflation in ways that other assets do not.  Its volatility, then, becomes an positive trait... not a negative one, when placed in an otherwise standard portfolio, because it does "its thing" exactly when you want it to.

That said, there's some concern that 25% is too much.  I can sort of see that, as the daily swings in gold in 1980 were massive.  To have an asset that you don't expect to exceed inflation (long-term) be that volatile I think it's best to limit your exposure to less than 25%.  That's just my gut feel... not trying to slam HB or the standard PP.

I think a VP made up partially of commodities that drive your lifestyle isn't too much of a mistake, though.  Owning some oil and natural gas related stocks or commodity funds could have its place.

[rocketdog]

I think a VP made up partially of commodities that drive your lifestyle isn't too much of a mistake, though.  Owning some oil and natural gas related stocks or commodity funds could have its place.

That was my intention with my VP: use a broad-basket commodity fund with a few select sector funds like energy, consumer staples, health care etc. 

I've just never heard the claim that oil is as closely correlated to gold as this article stated.  I'd think if that were true I would have heard about it by now. 

[MediumTex]

The price of oil is correlated with the price of gold.

The problem is that under some conditions the correlation seems to break down at the worst possible times (see 2008 for one example).

I have tried to come up with every imaginable trading strategy based on this relationship, but what you keep coming back to is that no matter how much currency devaluation occurs or how much peak oil-driven TEOTWAWKI scenarios unfold, the fact is that ALL commodities are going to see their prices decline in the face of collapsing demand that is triggered by a financial crisis.

The problem with oil, too, is that you really can't buy it in the way you can buy gold.  Imagine trying to store 25% of your assets in the form of crude oil.  You would need a pretty big garage or other storage facility.

[Kshartle]

My bet would be platinum is more closely correlated to Oil. Of course everything priced in dollars that isn't a bond is pretty much negatively correlated with the dollar.

[melveyr]

I think that gold takes a lot of energy to mine. You could probably explain a lot of the relationship with that simple causal factor.

[moda0306]

Maybe this is how to say it:

Gold correlates with gold until it doesn't, and that's precisely when we want gold in our portfolio instead of oil.

[rocketdog]

The problem with oil, too, is that you really can't buy it in the way you can buy gold.  Imagine trying to store 25% of your assets in the form of crude oil.  You would need a pretty big garage or other storage facility.

Clearly physical oil is completely out of the question.  I'm only talking about holding oil in the VP in the form of energy ETFs and/or oil producer stocks.  Just a little something to augment the gold holding in the PP.  It may or may not be a good idea to do so, but I thought I might give it a try for a while and see what happens. 

[steve]

http://www.gleasonreport.com/documents/ ... andard.pdf
this was written a while back by Tom Gleason.  Tom also was and still is a advocate of prpfx.

[MediumTex]

The problem with oil, too, is that you really can't buy it in the way you can buy gold.  Imagine trying to store 25% of your assets in the form of crude oil.  You would need a pretty big garage or other storage facility.

Clearly physical oil is completely out of the question.  I'm only talking about holding oil in the VP in the form of energy ETFs and/or oil producer stocks. 

After thinking about this a little more, perhaps you could buy motor oil and store it at your house.

Motor oil might be thought of as "numismatic" oil. 

[melveyr]

Another way to get around the contango/storage issue is to buy oil royalty trusts. These have some tax annoyances associated with them, otherwise I probably would have already have speculated in them. 

[MediumTex]

Another way to get around the contango/storage issue is to buy oil royalty trusts. These have some tax annoyances associated with them, otherwise I probably would have already have speculated in them. 

I tensed up when I read that.

There is a lot to know about royalty trusts if you are using them as a proxy for the price of oil.

One of the many things to know is that as a royalty trust owner, you don't really have any input into production decisions with respect to the properties held by the royalty trust.  If the operator chooses to shut in a well, scale back production or ruin the well trying to make next quarter's numbers, you really don't have any way to complain.  Since you never really know what the operator's cost structure is, he may decide to abandon a well that appears profitable.

These instruments can be great investments.  Be careful, though.  (There is also a whole lot of tax stuff to know when it comes to royalty trusts.)

[melveyr]

Another way to get around the contango/storage issue is to buy oil royalty trusts. These have some tax annoyances associated with them, otherwise I probably would have already have speculated in them. 

I tensed up when I read that.

There is a lot to know about royalty trusts if you are using them as a proxy for the price of oil.

One of the many things to know is that as a royalty trust owner, you don't really have any input into production decisions with respect to the properties held by the royalty trust.  If the operator chooses to shut in a well, scale back production or ruin the well trying to make next quarter's numbers, you really don't have any way to complain.  Since you never really know what the operator's cost structure is, he may decide to abandon a well that appears profitable.

These instruments can be great investments.  Be careful, though.  (There is also a whole lot of tax stuff to know when it comes to royalty trusts.)

TBH the tax complications prevented me from ever learning to much about them. Thanks for the info.

[MachineGhost]

What tax complications?  AFAIK, all they do is return capital masquerading as dividend interest which reduces your cost basis.