Trouble for Oil & Gold in 2010? No Worries (GLD, USO, SGOL, GDX, XOM, COP, OIH, GGN)

Have you noticed how so many commodity rallies in gold and oil get stopped in their tracks on what might seem as secondary or even tertiary cause and effect?  This has been something very defined in oil and gold, and in some other commodities as well.  This is going to create trading ranges for issues such as the SPDR Gold Shares (NYSE: GLD) and in theory the United States Oil (NYSE: USO) ETF, although we want to address a few instances of this creating buying opportunities on pullbacks in others.  Also in gold we look at the ETFS Physical Swiss Gold Shares (NYSE: SGOL) and Market Vectors Gold Miners ETF (NYSE: GDX).  In oil we tend to look at Exxon Mobil Corp. (NYSE: XOM) as the easy-money first pick and the turnaround of ConocoPhillips (NYSE: COP) next.  Also, as long as the price of oil does not get into a downward trend worse than just the trading range, then the Oil Services HOLDRs (NYSE: OIH) is the pick.  A wild card is The Gabelli Global Gold, Natural Resources & Income Trust (NYSE: GGN).

Trading ranges are tricky, but traders and investors can clean up in these environments even without knowing how to short-sell at the top of a range.  Much of the thesis will come down to buying dips, something that is in effect until there are real indications that the stock market in general is done rallying.  Adam Hewison of INO, our technical analysis affiliate, has two key issues here on the topic of toppy gold and a trading range in oil.

• No new highs in gold for 2011
• Oil now stuck in a trading range

Adam was dead right on his gold calls, where he was calling for longs since well before we were seeing $900 per ounce trades with calls up to $1100 and $1200 or higher.  Forecasting gold out a year for any peaks and dips is part alchemy, but there is at least a cushion there as gold would have to run up over $1,200 before any new highs were put in.  It may take more than the Paulson-Goldman angle to derail gold.

Hewison’s call on oil is one that does seem obvious about a trading range.  When oil started violating $70 it seemed obvious that the trade was to hold your nose and buy based upon a trading range.  We even noted, “Did Oil Just Bottom?” at the time.  The problem is that oil never stays down at the lower end of this $70 to $85 band very long and it seems to recover up to the top of the range more than it falls.  While there is concern of a double-dip recession and while the US may have its big earners clipped with higher taxes after 2010, the global economy is getting better and better outside of a few issues.

With T. Boone Pickens calling for $95 oil and with oil’s trend seeming to run up more than down, it seems that the $70 to $85 trading band has more upside-violation than downside violation.  So what are the big trades here for 2010 for going what feels like ‘way out into 2011’ in stocks and ETFs?

In gold, the SPDR Gold Shares (NYSE: GLD) is the easiest and most liquid instrument out there, followed by the lower-fee but lower liquidity shares of the ETFS Physical Swiss Gold Shares (NYSE: SGOL).  If you buy into the trading range mentality, all pullbacks are opportunities.  After all, Hewison has always maintained that gold is likely to appreciate handsomely over the long term and called for the return of gold in 2011.  As long as gold doesn’t see a major downside violation of the trading band and as long as you have no fears of another meltdown in the stock market, the Market Vectors Gold Miners ETF (NYSE: GDX) is what we pick every single time over ANY single gold miner because this is diversified spread among all major miners that protects against strikes, accidents, local regulation and more.  What’s more, their is a pairs trade that occasionally comes up between the GLD and GDX.

Exxon Mobil Corp. (NYSE: XOM) is the first of the big picks for oil as it stands today due to several factors.  The Big Blue of oil is getting larger with the buyout of XTO Energy Inc. (NYSE: XTO).  This is going to likely keep a cap on Exxon’s dividend, but it has also kept a cap on the shares of Exxon.  With shares around $69, the 52-week range is $63.56 to $76.54.  Pullbacks are the opportunity here even if the old $90+ highs of 2007 and 2007 are not likely to be seen for some time.  The biggest issue we have here is one of market cap, as it just takes billions of dollars of inflows into the stock to move it higher each day.

ConocoPhillips (NYSE: COP) is one that is still attractive as a turnaround play in the oil patch.  This is one we called on in 2009 to double by the end of the recession with an implied target of $68.00 at the time.  The problem is that Exxon Mobil’s underperformance and the handy recovery of Conoco makes the continued bet here that the turnaround will continue into a total turnaround success rather than catching a turnaround in the early stage.  With Warren Buffett still unloading shares, making money in this one will not be as easy ahead as it was when it was distressed turnaround.  The relative performance makes Exxon Mobil an easier pick outside of the relative market cap issue.

The Oil Services HOLDRs (NYSE: OIH) is the easiest way to play the trends in the oil services sector, although this one has come to the higher end of its range as well.  At $130.50, the 52-week trading range is $81.98 to $134.45.  With the consolidation taking place in this sector, the ETF is far easier and safer than picking individual service companies unless you think you have a special knack for accurately identifying the next company to be acquired in the space.

A last pick for buying dips is The Gabelli Global Gold, Natural Resources & Income Trust (NYSE: GGN).  Who ever said gold doesn’t pay a dividend.  The key difference here is that this is a closed-end fund rather than an ETF, but it invests in firms operating in gold and natural resources that are in exploration, mining, fabrication, processing, distribution or trading of gold and other gold-related activities.  The difference is that it also invests in companies in the exploration, production or distribution of natural resources (gas, oil, paper, food, agriculture, forestry products, metals and minerals) and transport services and equipment makers in the field.  Its $0.14 regular dividend has been in place almost since 2005 with an annualized dividend of $1.68 for a yield of 9.35% based upon a $17.95 stock price.  With a 52-week trading range of $12.50 to $19.77, we would only look at this when it sees pullbacks.

If you want to know why the United States Oil (NYSE: USO) was eliminated, that is simple.  Tracking error and price erosion during major market moves.  ETFs and ETNs that do not trade normally make these good for trades-only rather than real investment vehicles.

Much of this may seem like common sense to only buy on dips.  The problem is that the dips have been small and the time the dips last has been very short.  Chasing stocks, funds, and ETFs after big gains through time usually leaves most investors feeling like the door slammed on their fingers.  Opportunities are out there in both gold and oil.  There are just more caveats now than there were in the prior months. Many more.  There are also dozens of others in the gold and oil sectors when it comes to funds, ETFs, and individual stocks.  At this point in the game, barring any new major developments, the major names offer more predictable returns and lower downside than the speculative names.

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JON C. OGG