Is Oil a Better Inflation Hedge Than Gold?

DRIGGS, IDAHO – Justin Bieber has a new music video out. It’s called “Holy.” In it, Justin Bieber depicts himself as an oil field worker. When his employer goes out of business, he’s left homeless…

The entertainment industry has a way of predicting turning points in the markets. When ideas have become so popular they show up in popular culture, it’s a sign they’ve reached saturation in the marketplace. When there’s no one left to buy… the price falls…

I’ll always remember the Jay-Z music video from late 2007 where he flashes a wad of cash… but instead of dollars, it was a wad of euros! It was such a deliberate message…

At the time, the dollar had been in a bear market for seven years. This Jay-Z video caught my attention because I had been expecting the dollar to begin a turnaround. I took this as a sort of anecdotal signpost that I was on the right path.

His music video ended up marking the exact beginning of a 10-year decline in the value of the euro versus the dollar…

Are oil stocks the great contrarian trade of 2020? I think they might be…

I’m Not Buying the “End of Oil” Argument

All the major oil forecasting agencies (IEA, EIA and OPEC) have reduced their outlook for world oil usage.

World oil usage has risen consistently for 100 years. It’s very rare for world oil consumption to decline on an annual basis. In fact, it’s only happened twice before… in the early 1980s and in 2008/09.

Some oil analysts are saying that oil consumption will NEVER return to 2019 levels again – a sort of “End of Oil” argument.

But the general consensus seems to be that oil consumption will return to 2019 levels by 2022 and continue its long-term trend growth.

Meanwhile, activity in the oil patch has collapsed and the U.S. shale boom is over… probably for good. (Experts predict that U.S. oil production will fall by more than 3 million barrels per day between now and the end of 2021.)

So we’re setting up for a supply crunch.

Meanwhile, investors now have the least exposure to oil of any time in history.

The mighty Exxon, a great business for many years, has a 10% dividend yield. Schlumberger – the largest provider of oilfield service – is trading below prices it traded at 40 years ago. (Meanwhile, the broad market is 30 times higher.)

In 1980, energy represented a third of the S&P 500 and six of the 10 largest companies in the world were oil companies. Today, oil represents just 2.3% of the S&P 500.

And now, Justin Bieber has made a video depicting hard times in the oil patch.

(Just in case that’s not enough, The Economist just used the headline “Is it the end of the oil age?” in its latest issue…)

Wall Street analysts wouldn’t take these sort of anecdotal indicators seriously. But I’ve learned to pay attention to them…

A Better Inflation Hedge Than Gold?

I’ve said this before, but I’ll repeat it. I believe we’re heading into a period of stagflation. That is, a stagnant economy and inflation.

I saw these charts on Twitter today from one of my favorite analysts, Jim Bianco. They go back two centuries.

The first chart shows the federal budget deficit or surplus as a percentage of GDP. The second chart shows the year-over-year change in CPI (Consumer Price Index) inflation.

I notice two things from these charts. First, we have the greatest federal deficit in history outside wartime. And second, history shows that huge federal deficits always lead to inflation.

Research shows that oil stocks are the best inflation hedges, even better than gold.

– Tom Dyson

P.S. Oil tanker stocks are pretty much the most beaten down, unpopular, unloved sector in the entire stock market. But I’m betting that the next surge is right around the corner…

In my Tom’s Portfolio advisory, we’re positioned to ride this surge higher with the top four tanker stocks. These are companies that are flush with cash and healthy financially, in a temporary lull between surges. If you’re not a paid-up Tom’s Portfolio subscriber yet, find out how to get access to my full list of oil tanker stocks right here.

Like what you’re reading? Send your thoughts to [email protected].

An offer for the Dysons to join a homeschool group… and thoughts about bitcoin…

Reader comment: Hello. This is my first time writing you, having only recently discovered your postcards via one of Palm Beach Research Group’s other publications. Just wondering if your family (especially Kate) has connected with a local homeschooling community. If not, she would be welcome to join our group…

Tom’s response: That’s very kind of you to offer… I’ve passed your message along to Kate…

Reader comment: Hi Tom, given that it appears you are now officially a bitcoin skeptic, I would strongly encourage you to read this recent thread posted to Twitter by Raoul Pal from Real Vision. I believe he summarizes well why your position is dead wrong that bitcoin is ultimately a zero. I would suggest you share this view with your readers if you truly care about their financial futures. Even for a skeptic like yourself, you would have to admit that owning bitcoin is an asymmetric bet, and worth at least a speculation with 1-5% of a portfolio.

Tom’s response: I like Raoul Pal’s work and I enjoy reading his Twitter posts. I’d rather bet on oil than bitcoin…

Reader comment: Good morning. I enjoy reading your accounts and appreciate your “expose” on cryptocurrency; the only purpose I can see for bitcoin and its ilk is that it gives a semblance of hope to people in inflation-ravaged countries whose currencies seem to depreciate daily. Sadly, I’m reminded of a drowning man grasping at a straw in those situations; otherwise these digital shenanigans are modern-day versions of “Tulipmania.”

Though bitcoin has been extant for almost a decade, I recently took notice of it and attempted to understand it in an effort to determine if I wanted to invest any of my limited funds, but something about the concept didn’t ring true. Thanks to your explanation, I now have no desire to or no interest in cryptocurrencies at all. It’s also worth noting that a new one seems to pop up every few months with a new claim of improvement; frankly, all of them border on being Ponzi schemes (in my opinion), similar to those of current world currencies. Like you, I’m a believer in hard assets, but only if they glitter or shine, and I can hold them in my hand.

Reader comment: Mr. Dyson, your posts on your family journey around the country have been faithfully read by me. Like yourself, quite a few years ago now, I put most of my savings into one-ounce gold coins. Like you, I am standing by.

Tom’s note: As always, thanks for your kind messages. Please keep writing us at [email protected].