A Twofer: Gold and Oil

February 26, 2009 | By: Hard Assets Investor

By Brad Zigler

There was a little drive-in joint in my hometown that used to drum up midweek business by advertising "Twofer Tuesdays." The cheapskates downtown loved the $1.49 hamburger-and-taco combo.

We're a couple of days beyond Tuesday, but you can still get a twofer. Better still, you won't have to trade kopeks for calories. Your twofer is free.

Item No. 1 - The GLD/GDX ratio has popped up in a reversal move over the past two trading sessions as gold prices tumbled. The SPDR Gold Shares Trust (NYSE Arca: GLD) is a grantor trust that holds bullion; the Market Vectors Gold Miners ETF (NYSE Arca: GDX) is an exchange-traded fund that tracks an index of three dozen mining stocks.

Gold Bullion Vs. Mining Stocks

You'd think, with bullion selling off $40, you'd see GLD lose ground. Well, it has. GLD's share price has sunk 5% since last week. Mining shares, however, have given up 11%, so the ratio - which is the quotient of GLD's price over GDX's - moved up in GLD's favor. This after a four-month run-up (which, on the chart, looks more like a run-down) in mining stocks.

Half your twofer for today is advice to keep an eye on mining stock momentum. It's flagging now. The question is whether the sector's just catching its breath or if it's setting up another stair-step to a higher ratio. The ratio finished at 2.83 Wednesday. A resumption of gold miners'

uptrend would be reflected with the ratio down at the 2.65-2.67 level.

Stay tuned for updates.

Item No. 2 - A crack appeared in the NYMEX crack spread Wednesday as oil prices spiked higher (if the notion of a crack spread seems foreign, see "Time For Crack Spreads?" for an explanation). Refining margins - the profit a refiner can earn from cracking crude oil into distillates - has been eroded to levels not seen since early January.

Margins on heating oil (HO) and reformulated unleaded gasoline blendstock [RBOB] have fallen over the past month.

Distillate Cracks

Typically, gasoline cracks top just ahead of the summer driving season. This year, of course, has hardly been typically. There's a lot more price volatility and, in turn, margin volatility, this year.

Perhaps, then, some slack ought to be allowed. After all, we don't seem to be finished with the winter maintenance cycle yet.

Nonetheless, the crack spread bears watching. Which, of course, we'll continue to do.

Now, you want fries with your twofer?

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