Oil Is the New Gold

 | Jun 20, 2013 | 9:34 AM EDT
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Gold is in a virtual free-fall this morning, dropping below $1,400 an ounce for the first time in two years.

Federal Reserve chief Ben Bernanke's FOMC statements Wednesday were correctly interpreted as the start of reduced bond purchases by the Fed and an ultimate tightening of interest rates. The reaction has been swift: The Dow is off by close to 350 points in less than 24 hours (if the futures are correctly forecasting today's action), and 10-year Treasuries are getting hammered.

But gold is, by far, the weakest of all. It seems the last bastion for economic diversification -- the one depended upon for the past 20 years as the protector of value against volatile paper asset classes is finally relinquishing its importance. Yes, gold is officially rolling over.

What that means for oil is very important and specific. I have been a longtime proponent of hard assets as a diversifier for paper investment (although I've never understood the allure of the yellow metal and certainly never traded it correctly). But I've done well with oil and there's a reason I've found it more fathomable as a hard asset: You can burn it and it will give you heat and energy; try that with a block of gold.

It's occurred to me in the last several weeks, as the FOMC rumor mill caused massive volatility in the stock and bond markets, that oil has remained not just steady, but amazingly so -- it hasn't just quietly steadied its price but has managed a fairly substantial rally without much fanfare. That says something to this trader; I've always believed that the markets are the absolute arbiter of everything.

Oil is acting well while gold is acting poorly in the face of paper-asset market volatility -- oil is becoming the new gold.

It isn't better than gold, or a currency substitute. Most of what I see happening in the oil market is a function specifically of what's happened with gold. The yellow metal looks like a tired trade. It's had an amazing run without much (really, without any) retracement. It's a retail investor's play, and, therefore, in the hands of fickle owners. And everyone's looking for the next safety play.

I don't believe that Bernanke's statements signify a two-year top to the stock market. While I've felt that this year's gains were stretched and recent volatility is not normally bullish, there was always the prospect of waning Fed activity on the horizon. This is a road we were destined to travel.

But I also want stocks that can take advantage of and monetize a high price for oil that looks like it can drift higher still, even in the face of the Fed's tightening threats. That means, now more than ever, you need to be in big, integrated exploration-and-production names in the space as a diversifier to counteract the vulnerability of paper assets, like stocks.

If that doesn't make sense immediately, it will. Because mega-cap oil names that generate a steady dividend and have underperformed miserably in a Fed-induced stock market rally are the perfect place to be in the next several quarters of Fed-induced volatility and rising oil prices.

BP (BP) delivers a yield of 5% and Royal Dutch Shell (RDS.A) delivers 4.7% -- because oil is the new gold.

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