Cracking the code of deserving prices for oil futures has become an interesting game of cat and mouse between the bulls citing a momentous trend of dollar destruction gaining momentum and fundamentalists hammering home the demand side of the argument. True, inflationary environments for currencies allow for the relative value of commodities priced in the domestic paper to increase. But how valuable is the asset actually? Can one actually short a commodity when the currency it is traded in continues to lose value? Of course a sophisticated trading platform with forex exposure could hedge out the negative effects of a deteriorating dollar on a short oil bet. One way for an average investor to take advantage of this situation and minimize their risk of loss is by playing the volatility through shorting the economic output end (demand) of the commodity basket and buying long the inflation end (supply).
This can also be difficult to the average investor because there is no pure way to play this through equities or ETF's, but here we will examine some possible strategies. One might suggest that you simply short the WTI spot ETF (USO), but many of these organizations are bundled into "basket funds" or even mainstream indexes such as the S&P 500, causing for unreliable price fluctuations. These firms must also be exposed at some level to one or many currencies, which could deteriorate in a global inflationary environment.
Perhaps instead you short a firm's equity whose main line of business is refining petroleum and simultaneously buy an equal dollar value of shares in a firm leveraged to take advantage of a devaluing currency (i.e. gold producers). Buying into a corporation based in an economy fueled by commodity exportation will also increase the ability for the average investor to shield against currency depreciation. With this strategy an individual will not be exposing his hide for a slashing should the inflationary environment take longer than expected to set in, potentially exaggerating the gains from the Short crude position, while also allowing a short entry point by selling the long gold shares and buying more oil shorts.
Going short the USO (WTI crude oil spot ETF) and long international gold miners such as Company De Minas Buenaventura (BVN), based in Peru, could be used to achieve this strategic position. BVN is emerging from a strike situation at the moment and may provide a cheap entry point into a growing firm in a commodity exporting currency.
