NOTE: This is a highly theoretical post. This Web site and its author take no responsibility for any actions taken as a result of this piece. Or of anything. We are, in fact, highly irresponsible and it’s not our fault if you lose money based on something you read on the Internet. That means you’re an idiot, not us.  

Stressed out about high oil prices? Confused about the direction of gold prices? Don’t care about anything other than tonight’s season finale of “Lost”? Well there’s a way for you to make a couple of bucks anyway. You’ll need the following:

1. $14,243. Actually, make it more like $30,000 or $40,000 just to be on the safe side. I’ll explain that in a second.
2. An account with a commodities broker.
3. A lot of patience.
4. Balls of steel.

An explanation of what it’s all about and what to do after the jump: 

Okay, so, a while ago, I was watching CNBC and some guy was on there saying that it usually costs the value of one ounce of gold to buy about 9 or 9 ½ barrels of oil. That means that, no matter what the prices of oil or gold are, if you have an ounce of gold in you pocket, you can theoretically use it to buy 9 barrels of oil. I thought this guy was on crack. Then I went and looked at the data for the past five years.

From around April 2003 to April 2008, it was more or less around 9 or 9 ½. Actually, back in ’03, an ounce of gold (which went somewhere between $330 and $380 at the time) bought you more like 12 or 13 barrels of oil (which went for around $25 to $30 a barrel). This ratio held up pretty well even when gold started going up in price to $750 an ounce (with oil going to around $80/barrel). The thinking on this was that it wasn’t so much that gold or oil were getting expensive; it’s that the US dollar – the currency all of these things priced – is becoming a worthless piece of junk, thanks to the combined stupidity of the Federal Reserve Bank, the Democrats in Congress, and the Republicans in the White House.

Everything was going up in price because the US dollar was worth less compared to other currencies. You can think of gold as a form of currency, too. Instead of that currency being called, say, a dollar, it’s called an ounce. In that regard, the price of oil remained steady for years: one ounce buys 9 or 9 ½ barrels.

Then, around April or so of this year, speculators – and probably the Red Chinese – went on crack and started buying up oil like there was no tomorrow. Right now, one ounce of gold only buys like 7 barrels of oil.

However, nothing has actually changed with the fundamentals of oil. More or less, the same stuff gets drilled out from the same places and used by the same people. More or less. Okay, so, maybe there’s a slight increase in demand. But it hasn’t gone up, like, 300% more in the past five years.

So what gives?

Who knows? My guess is that speculators are all pushing up the prices because… they’re stupid. Hey, you Obamanistas and MoveOn.org types: Don’t worry about greedy speculators making too much money because, in my opinion, they’re gonna get their clocks cleaned by the market. The Federal Reserve has finally figured out that, hey, maybe lowering interest rates doesn’t do crap for the economy at this point and may actually make things worse by flooding the economy with increasingly worthless dollars. That means inflation.

The way to combat inflation is with higher interest rates (I’m not going to get into a long discussion about how that works; just follow me here). Higher interest rates means people from all over the world start putting their money in US banks again to get higher interest on their money. That increases the demand for US dollars. That means the value of the dollar goes up. And when the value of the dollar goes up, the price of oil AND gold goes down. By how much? I dunno. But I think oil will probably get knocked down a lot fast than gold.

Remember that list at the beginning of this post? You don’t? Take time to read it again and scroll back down to here. Done it? Good.

Now, take the money and deposit it in a commodities trading account. Don’t have one? Open one up. Do your own research on whom to use. I have one with Lind Waldock because they let me trade (and lose) all my own money online without having anyone warn me/talk me out of it. However, they do call me all the time when I lose money to tell me I have to fund my account.

Oh, did I tell you I’m bad at this? Anyway, yeah, so you need the money for your margins. For one contract of oil – which is for 1,000 barrels of oil – you only need $9,788. For a contract of gold which controls 100 ounces, you need just $4,455. That’s where I got the $14,243. Oh, and note the contract sizes? 1,000 barrels of oil versus 100 ounces of gold. That’s 10 to 1, which is close enough to 9 barrels of oil to 1 ounce of gold. So why did I say you need $30,000 or $40,000? That’s ‘cause once you start playing the commodities market, you better hold on to your f’in’ hat.

One small (and wrong) move and you can get wiped out in an instant. Every dollar move in gold means you either lose $100 or you gain $100 and I’ve been through days where gold has moved around $30 an ounce (that’s $3,000 in a day. Lost. And I’m not talking about the show “Lost”. I mean, I lost $3,000).

Plus, if gold moves against you by, like, $10 an ounce and you’ve only put in the minimum $4,455, your broker is going to call you up and say you need to put in another $1,000 or so just to keep your account from getting called – meaning, they’ll force you to sell your position and you’re S.O.L. Trust me, the way this gold and oil move, you want to be as safe as possible. The more money in your account and the smaller the position, the safer you’ll be.

Okay, so here’s what you’re gonna do: You’re going to go “short” (meaning sell) one contract of oil (1,000 barrels) and you’re going to go “long” (meaning buy) one contract of gold (100 ounces).The good part about commodity trading is that you get to push around nearly $100,000 worth of gold and/or oil with just, say, $5,000 or $10,000 of margin. The bad part about it is that you can easily wake up one morning owing $20,000 and finding you’ll have to sell your mom’s car to make payments within three hours.

I would choose a contract out to, say, December. As of this writing, December 2008 oil (that is, a contract to deliver 1,000 barrels of oil in December) is trading at about $129.96/barrel. December 2008 gold is trading at about $913.70/ounce. That ratio is just about 7 barrels of oil to 1 ounce of gold. By selling that one contract of oil and buying that one contract of gold, it’s the equivalent of “buying” 1 ounce of gold with 7 barrels of oil.

The strategy is to “sell” that gold for 9 barrels per ounce when it gets to that ratio. That is, you buy one contract of December oil and sell one contract of December gold when the ratio is back to 9 to 1.How much can you make? Okay, well here are some examples:

1. Suppose gold stays around $913.70/ounce. Oil, however, drops to $101.50/barrel. You get rid of your gold contract and you buy back your oil contract. You’ve made $0 on your gold but you’ve made a profit of $28,460 ($129.96 - $101.50 x 1,000 barrels).
2. Suppose oil stays around $129.96 but gold goes up to $1,169.64/ounce. Again, you get rid of your gold contracts and you buy back your oil contract. You’ve made $0 on your oil but you’ve made a profit of $25,594 ($1,169.64 - $913.70 x 100 ounces).

   Okay, that would be dandy. But, we all know that prices don’t stay the same. What happens if they both move?  

3. Suppose gold moves up to, say, $935/ounce and oil moves down to $103.88/barrel. You sell your gold, making $2,130 ($935 - $913.70 x 100 ounces) and you buy your oil, making $26,080 for a total of $28,210 in profit.
4. Suppose gold moves down to $835/ounce and oil moves up to $150/barrel. You lose $7,870 on your gold contract and you lose $20,040 on your oil contract for a total LOSS of $27,910.

Chances are you’ll more likely see scenario #4 before any of the others. However, if you have $30,000 to lose, this may be a fun trade to take on.

Then again, if you have $30,000 to lose, just give it to me.

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