Oil, the Dollar and Gold ETFs Are Working Together

Slight upticks in the dollar against the euro this week may be in sync with investors timing their re-entry into the market and ETFs.

On Thursday, the U.S. dollar was up to an eight-week high against the euro in overseas trading, with the speculation of a possible slowdown in Europe that will allow the European Central Bank to cut rates, reports Peter A. Grant for GoldSeek. The dollar seems to be contained against two other major currencies, the Japanese yen and Swiss franc.

All the while gold has kept a solid stance, and oil is only heading higher lately with the newest record high reached on Friday: $126.20.

The streetTacks Gold Shares (GLD) has been turning around with positive performance in the last week, up 3.4% in that period. As long as oil continues to rise in price, it's believed that gold should continue rising along with it.

When the Price of Oil Goes Crazy, What Happens to the ETFs?

We all know how oil futures and ETFs that contain them operate. But if you've ever wondered if the markets could ever "stop the madness" that is the rising price of oil, the answer is "kind of."

The New York Mercantile Exchange [NYMEX] has circuit breakers in place when prices move by $10 in either direction for all months. If any contract is traded, bid or offered at the $10 limit, trading is halted for five minutes to allow traders to regroup. When it resumes, a new $10 limit is put in place and if that's reached, trading halts for another five minutes, and so on.

So, it's possible for oil to gain or lose $30 or even more in a day, but the five-minute breaks cool things off a bit before they pick up again.

It's likely trading in ETFs that contain oil futures would halt for five minutes as well. At the very least, the bid/ask of those ETFs would widen out in those five minutes because market makers wouldn't have a "live" price to use.

Using Energy ETFs To Offset Gas and Oil Prices

Frenzy in the energy sector has reached a fever pitch, but are ETFs that allow investors to hedge those prices necessarily a great idea?

The summer driving season is going to kick off soon, but with the way things are going, who can afford it? Oil passed $126 a barrel on Friday, while gas rose to more than an average of $3.67, reports John Wilen for the Associated Press.

Oil's price spike came after concerns about Venezuelan President Hugo Chavez's ties with rebels who are threatening to overthrow Colombia's government. It may raise chances the the United States will impose sanctions on one of its largest oil suppliers, and Chavez might then cut off our supply.

Many investors have been looking at situations like this and wondering how they can lock in the lower prices and profit from the price hikes. ETFs that hold oil and gas futures are designed to rise in value at the same time their underlying commodities are going up in price, reports Rob Wherry for Smart Money.

Natural gas has benefited from the fear that supply and inventory issues will push crude-oil prices even higher as well, says John Spence for MarketWatch. ETFs like U.S. Natural Gas Fund (UNG), up 50.1% year-to-date, has also served as a means for investors to hedge their exposure to energy.

With all this good energy flowing around the markets, a new alternative energy ETF has been launched. The Claymore/Mac Global Solar Energy Index (TAN) debuted on April 15, and has lured plenty of interest. Steve Gelsi for MarketWatch says this has been the second-fastest growing ETF from Claymore thus far. The TAN index invests in 25 companies chosen under the MAC Global Energy Index. The fund is up 0.2% since its launch.

The one hindrance to hedging is that the people who need the hedge most might be among the least likely to actually have the cash on hand to do it. And then there's the matter of the tax bill if a profit is made.

You can't forget the volatility of the energy market, either. It's prone to wild swings in either directions, and some suspect it's a bubble that's ready to burst.

This feeding frenzy in energy ETFs means that the more people who buy, the more the price goes up. It's hard to know where the speculation on rising prices ends and natural demand begins.

But if you look throughout history, whenever there's been a major bull trend, people will inevitably say it's a bubble. That may very well be the case with oil, too. But it could also go up another 50%-100% before that happens.

Don't fight the trend. But have your stop loss in place if the bubble does burst.

Other funds that trade energy futures are:

• United States Oil (USO), up 32.8% year-to-date
• United States Gasoline (UGA), up 17.3% since Feb. 28 inception

• Are Oily Characters Behind Crude's Price Move?   »
• Just a Commodities Correction - Not the End of the Bull (Part 2)  »
• The Economic Consequences of Falling Oil Prices  »
• U.S. Energy Weather Update  »
• Valero, Tesoro: Margin of Security in Refinery Assets  »

Tom Lydon

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