Oil Stocks: Why They Say $100.00-a-Barrel Oil Is a Reality

Long-time subscribers know my fondness for stock price charts in determining future trends. I believe, most of the time, that the price of stocks are a leading indicator of what lies ahead, especially for individual stock sectors.

Months before the turmoil in Egypt erupted, the price of oil started to rise. After crashing to a low of about $30.00 a barrel in the depth of the 2008 financial crisis, oil came running back to $91.00 a barrel. (While the Dow Jones Industrial Average is up 87% from its 2008 low, the price of oil has risen 200% since its 2008 low.)

Looking at the charts right now, the Dow Jones U.S. & Gas Index literally shows a straight line upward from September 2010, when the index traded at 440, to 635 today—a gain of 44% in five months. The chart screams of higher stock prices ahead for the oil companies—which the market obviously relates to higher crude oil prices.

Blame the exploding economies of China and India, a colder-than-expected 2010/2011 winter in the northeast U.S., an improving North American economy, tensions over the Suez Canal, and recovering car sales worldwide, but the stock price charts indicate that oil prices will continue to rise.

Now my two contrarian spins on rising oil prices:

Firstly, rising oil prices are inflationary. With inflation come rising interest rates. Secondly, crude oil is priced throughout the world predominately in U.S. dollars. As the U.S. dollar continues its long-term devaluation against other world currencies, the price of oil rises, because it takes more real U.S. dollars to purchase crude.

I’ve often looked at crude as a “put” against the declining value of the U.S. dollar. The more the greenback falls in value against other world currencies, the higher oil prices move. Who knows; maybe one day world oil producers will demand payment for their crude in non-U.S. dollars. Anyone say “gold?”

Michael’s Personal Notes:

While I was driving downtown late yesterday afternoon, I was listening to the radio. Three CNBC journalists were interviewing the president of Newmont Mining Corporation (NYSE/NEM).

The first asked about what happens when gold prices run up to $1,500 an ounce and come running back down. Another asked why Newmont doesn’t hedge its bets, with the price of gold so high right now. A layperson listener like me couldn’t help but notice that all three of the CNBC interviewers were negative or bearish on gold.

When the president of Newmont got off the phone, one interviewer basically said to another interviewer, “What happens when the price of gold bullion comes crashing below $1,000 per ounce; how hard will Newmont stock get hit?”

My two points on this: the majority of investors do not believe that the price of gold will continue to rise. Wednesday, I quoted a recent Bloomberg poll that said more than half of 1,000 investors polled thought the gold market was in a bubble. As long as this negativity towards gold bullion exists, the price of gold will continue to rise.

Secondly, there was no mention during the CNCB Newmont interview of the effects of the price of gold, because the U.S. greenback is devalued against other major world currencies. This is key; the purchasing power of the U.S. dollar is a major factor in the pricing of gold bullion.

After Barrick Gold Corporation (NYSE/ABX), Newmont is the second-largest producer of gold in the world. The amount of $10,000 invested in Newmont stock in 2001 would be worth $38,220 today, even after the recent correction in the gold prices. Newmont has been an excellent way to play the run-up in gold prices.

Where the Market Stands; Where it’s Headed:

More of the same…with all the liquidity in the financial system, with investors wary of putting their money in bonds as interest rates rise (bonds fall in value when interest rates rise), with the economy looking like it is getting healthier every passing day, and with corporate earnings rising, why won’t investors put money in stocks?

In the immediate term, I expect stocks to continue rising. Short- to long-term, it is a different story. Yesterday, the 10-year U.S. Treasury hit a high not seen since May of 2010. Interest rates are going up globally.

The Dow Jones Industrial Average opens this last trading day of the week up 4.2% for 2011.

What He Said:

“I see a deal when it’s a deal. And right now there’s a good “for sale” sign flashing on gold bullion and gold producer shares. In fact, after peaking at the $690.0-an-ounce level earlier this year, gold could be a bargain at its current price of around $650.00 per ounce. As a reader, you are undoubtedly aware of my negative stance on the general stock market and the U.S. economy. As the economic problems continue to brew in the U.S., as these problems develop into others, and as they are finally exposed, what other investment but gold will worldwide investors turn to?” Michael Lombardi in PROFIT CONFIDENTIAL, March 14, 2007. Gold bullion was trading under $300.00 an ounce when Michael first started recommending gold-related investments. Many gold stocks recommended in Michael’s advisories gained well in excess of 100%.
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