Gold and Oil

GOLD

Gold hits $876 this morning on the February futures contract. I remember a year or so ago discussing gold ... when it was in the low $600s. The question from a friend was regarding the psychologically difficult decision whether to hop onto the move since the lows under $600 had been missed. My reply was that those $25 missed look really small compared to the gains when gold hits $1000. Missing a low or buying too early are psychologically difficult barriers to overcome when trying to buy for the big, long term move. The barriers are magnified as they seem to be big percentages of the original amount. This is why I think about what the prices will be in one or two years. I buy a long term position on that basis - not the much smaller bounces and dips that occur as the beefers move around the stock or commodity.

So what now on gold ? I "plan" to hold it all until "about" $1000, then will sell a 'bit" - maybe 20% of my large position - on principle. That's been a long term target and not taking some sugar there would anger the trading gods, implying hubris and cupidity, which are punishable sins. After that, I will continue to hold unless something changes and review the matter.

OIL

At $100 per barrel, I believe that slow conservation is taking hold and reducing future total demand in the US and in many other markets, particularly the emerging markets where industrial and process decisions can be made to permanently reduce future demand. This will help keep oil from rising to levels well over $100 barring a supply disruption. And this conservation will give room for new needs and demand from emerging markets due to growth. So supply and demand seem balanced to me around this level. New production will go to replace declining old fields. A wide trading range from $90 to $110 seems likely to me.

So what to do about the oil stocks ? Those were big gainers in 2007. I've graded my oil positions 3, 2, or 1, which are rough $ value proportions of the holdings that I want to keep: DVN, CVX, COP, XOM, HES, MRO, SU. As my LT gains dates are hit, I'll cut back the stocks that I now grade as 2 or 1 to the appropriate level. I already took some sugar on some per my post of last Friday in the early AM - fortunate timing :-)

3's: DVN and CVX. these two companies have big deep water fields in the Gulf of Mexico and stand to gets big new reserves as those fields are developed. No selling here.

2's: XOM, SU, COP. XOM is well managed but has a higher PE; COP is poorly managed but has a lower PE and a lot of natural gas; SU is a very long term play on the oil sands in Alberta.

1's: MRO, HES. These are smaller integrateds that I've held as possible takeovers. HES seems fully valued now, but my LT date is in March.

Most of these, except HES, are still undervalued. As the confidence in keeping $100 oil increases, I think they will continue to increase in value. Also, at some point, - maybe this spring, refining margins will increase again which will help them all.

I grade VLO a 2 as it is very cheap and is integrating forward slowly into retail sales under its own brand. BTU is a 2, also. I will keep all of my RIG and DO as multi-year deep water drilling plays. At some point I'll probably sell NOV and NE, but can't now. In all cases, I sell on the periodic rips caused by beefer rotation.