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Oil, Gold, Debt, And The Future

08/18/11 08:20:17 AM
by Billy Williams

There are three key areas of the markets that are undergoing change right now -- oil, gold, US debt -- that offer the promise of tomorrow's above-average returns while at the same time inspire tomorrow's warnings as well.

Security:   TLT
Position:   Buy

With a looming European crisis hanging over the markets like the specter of death, you are left to wonder what segments of the markets are worth trading. There are three key areas of the markets that are undergoing change right now -- oil, gold, US debt -- that offer the promise of tomorrow's above-average returns while at the same time inspire tomorrow's warnings as well.

First, oil is the elephant in the room that so far every analyst is trying to come up with a smart answer as to why an in-demand commodity that every advanced industrialized country is clamoring for the price of which is acting as if a herd of lemmings were running off a steep cliff onto a jagged reef below. Simply, oil had been long suspected of running up in price based on little more than speculation. The oil markets are deeply influenced by OPEC and subject to event-driven news that is designed and timed to steadily pump up the price of oil for the benefit of both oil speculators and the oil-producing countries.

Anything that even remotely appeared to affect the flow of oil had a tendency to drive up the price of oil, but with a major financial crash looming over the horizon in Europe, the financial apparatus that acted as the framework for the buying and selling of oil is now under threat and resulted in traders cashing in their chips till sanity returns again. Paradoxically, this allowed sanity to return to the oil markets and price is now retreating to more stable levels even on an adjusted basis.

Oil will still be in demand when things settle down, but in the meantime, it will offer attractive prices to smart traders. Oil is still going to be slightly speculative, but therein lies its allure for those seeking high returns. As a value play, it is a strong buy at these levels, but on a speculative basis, it cannot help but run up as long as OPEC and other unstable oil-producing countries leak out news that the flow of energy could be compromised at any time while manipulating production and pricing at the same time.

FIGURE 1: TLT. US debt has become popular amid global traders who seek the stability of Treasuries in the face of a European financial crisis.
Graphic provided by:
Gold is a safe haven from all the volatility in the current financial environment, and with the US printing more and more money to provide liquidity in the markets, many countries who hold the dollar as a reserve are now looking for new alternatives, including gold. While gold is a precious metal that produces no interest or dividends, its inherent value has been the standard for wealth and protection, which is why it is a strong buy in these uncertain times -- that, and the fact that it has been on a steady trend upward since the turn of the 21st century and a leader in the resource-driven bull cycle under way.

Debt, especially US debt, is another opportunity under way as the flow of capital moves sharply away from the volatility of equities and seeks safety in the form of a safe country where the rule of law reigns supreme. Despite the weakness in the US markets, it is hard to find a safer country to invest capital in than the US, especially in the form of 10-year Treasury notes. See Figure 1.

Yields are falling as the US Treasury finds that it no longer has to offer high yields in order to attract buyers of its debt as most traders and investors are more concerned with security and predictable returns versus uncertainty and unpredictable returns, as in the case of the stock market. The benefit to the trader is that exchange traded funds (ETFs) that track both US Treasury debt and shorting the yield on that debt have exploded upward and are likely to continue as long as fear continues to plague global equities.

As always, you want to use objective price analysis when sizing up any market, but these three markets are in the forefront of leading the next greatest trends upward and are a good place to start finding low-risk ideas to begin taking a position.

Billy Williams

Billy Williams has been trading the markets for 27 years, specializing in momentum trading with stocks and options.

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