I wouldn’t bet too heavily on the oil price receding soon, unless an end in conflict in Libya parallels in increase in production from Saudi Arabia which would be two factors to lower the price. It is better, in my opinion, to be hedging ones bets. If you drive a car and spend lots on oil then you might consider (once the price of oil goes back down) buying oil futures or if you’re feeling adventurous oil ETFs such as UCO. UCO (ProShares Ultra DJ-UBS Crude Oil) aims to reflect twice the percentage increase or decrease of the price of oil. If you are planning on going on a long distance trip in the future that requires oil (either driving or flying) you might consider buying a substantial amount of oil related securities so that if the oil price fly’s you will also be able to.

Ultra DJ-UBS Crude Oil (NYSE:UCO) will basically return double the daily increase of oil futures while UltraShort DJ-UBS Crude Oil (NYSE:SCO) will return double the daily decrease of oil futures, and before you decide on betting for or against oil see the prospectus for more information on these exchange traded funds.

Other options, which may be better suited and more safe for the casual investor, include buying into an energy company such as Exxon Mobil (XOM) or Cheveron (CVX) or simply buying oil futures . A more indirect approach at investing in energy prices is to buy other energy resource companies such as Patriot Coal (NYSE:PCX) which roughly follow (and in the case shown below outperform) the price of oil (See chart below).

Patriot Coal vs Oil Future

First of all, you need to find a broker (preferably one with a website and lower commission). You then need to set up your account for options trading – some brokerages require that you physically sign a document basically explaining that you understand the risks of trading options and what your experience level is etc.

There are options for from what I’ve seen all publicly traded stocks not excluding foreign ADRs. Call options can be defined as the option given to the purchaser of the option to buy a stock at a given price in the future. That given price is known as the ‘strike price’ and when the stock goes over that ‘strike price’ the option is said to be ‘in the money’ and the buyer of the option will most likely exercise the option.

For example, if a stock is currently trading at $3.50, the strike price is $6.00, and the option costs $0.50 a person can buy one option (a bundle of 100 stocks) for $50. Keep in mind buying the 100 shares of the stock normally would cost $350 at that same time. If the stock goes to $10 before expiration (the time at which the options can no longer be executed) the buyer of the option will willingly exercise the option and make $4 minus the price of the option ($0.50) per share which would be a $350 profit. If the stock did not go above $6 by maturity, however, the buyer of the option will get nothing. Keep in mind that usually call options get more expensive the farther out the expiration date is due to the risk of holding the stock on the writer’s side and the higher probability in general that the stock will rise above the strike price.

The person who writes the option believes that the stock will not reach $6 by expiration date and will have made $0.50 on every $3.50 stock in the 100 stock bundle in the option, not a bad way to make money on the share you own. The risk the seller (also known as the writer) of the option takes is that the stock goes below $3.00 (in which case the writer loses more than he gains by selling the option) or the stock skyrockets above the $6 level in which case the seller loses out on the profits of his stock because he is forced to sell it at $6. For the visual learner (most people) the chart below is a straightforward way of explaining how this works.

Long Call

Let me summarize a few key points that will often be brought up in these grim yet true commentaries and tidbits. Public debt is another name for government debt, and the debt I refer to is that of the Federal government. It is called public because the government traditionally draws income from the public through taxes. Of late the government has had to draw upon other sources for money including loans to other countries accomplished through treasury bills and other instruments where the government promises to pay interest provided they are loaned the money.

The national deficit, which is the difference between Federal government revenue and spending, was $1.4 trillion dollars for fiscal year 2009 – the largest on record and in terms of purchasing power the largest any country in history has ever overspent. The deficit is possible through the trust of the dollar and the US government – yet history has shown that national debt and high deficits are rarely actually paid off through painful budget adjustments and shrinkage of government.

In fact quite the opposite is true, the government will actually either destroy its own currency or heavily increase taxes – the first of which will be good for manufacturing yet destroy whatever wealth families have accumulated over the years in order, and the second of which stunts growth and would result in less jobs locally.

Let us hope the less trodden path is taken and prudent budget adjustments are made and expensive and useless wars are avoided. In this way the dollar may survive and people wont be forced into bartering for goods and going back to the financial stone age.

Another important point to bring up is the actual production of goods and wealth. If the US was able to increase economic output in areas which haven’t already succumbed to the manufacturing advantages of certain Asian countries it could also reduce its deficit via a shrinking trade deficit (which I should are proportional to national debt). As it stands, each working person in the United States owes over $60,100 if the national debt was evenly distributed amongst them. Over 10% of 2009′s tax income will go towards paying public debt, the amount of debt the U.S. bears is around four times its annual income (compare that to a person who makes $100,000/year whos debt is $400,000). Another interesting blog I read puts the US in the ‘subprime’ category for buying a house.

How can you protect yourself from this? Aside from education, I would suggest either buying silver, owning land, steer clear of keeping large amount of money in low-yield bank accounts or checking accounts, and most importantly invest wisely. Of course spending money, while ironic, is one of the best ways of not accumulating it. Spending it on things that retain value is also a good idea. If you have any more ideas feel free to comment.

Local dealers, on the other hand, will most likely mark you up only $50 to $100 above spot price (5 – 10%).

It is for this reason I recommend, if you are to buy physical gold, to go to your local dealers and gold shops and buy it from them. This also excludes the shipping fees and also potential loss or damage during shipping.

Does the following look familiar to you? If you were a Goldline customer they will say this is a collector item yet they ship them to every single customer and when the price was under $1000 / ounce they were charging more like $1300.

Following the gold surge will most likely come the oil and metal price surge, and then food and drink surge. Personally, I only value gold in it’s investment value as I think the metal is dull and boring and less desirable than steel, but investors around the world often rely on this ancient money when governments bombard them with tons and tons of freshly printed paper labeled ‘money’.

Investments in gold will yield limited profits though, as historically speaking investing in the stock market yields better results. Investing in today’s stock market is risky, but historically speaking if the companies you invest in today can survive and prosper tomorrow you will get a lot more returns than if you invest in gold or other precious metals. That being said, a moderate investment in gold (hopefully when it was below $800 / ounce) is not a bad idea ‘for the rainy day’, or you could invest in cultivating a garden or honing skills in what you do (be it engineering, craftsmanship, building, etc.) so that you can always have what the Chinese call a ‘tie fan wan’, or ‘iron rice bowl’, meaning a steady source of income.

Gold is currently trading at around $1040 per ounce, meaning a mere three gold coins will get you a decent used car. Only one gold coin will get you a shiny new state of the art PC, and just 100 ounces of gold will get you a nice house in the suburbs (depending of course where you live). So is it too far fetched to say that gold is overvalued?

The rate of gold production is much different than that of oil, as it has been increasing steadily for the past 100 years while some experts warn of ‘peak oil’, or the soon to be realized time of worldwide peak oil production and the eventual inevitable decline in oil production.

One can also look at the US gold production and notice a sharp increase and contrast this with the decrease in production of oil.

US Oil Production

Resources:

Recent Gold Production

http://minerals.usgs.gov/ds/2005/140/

Historical Gold Production

US Census Bureau (1960) Historical Statistics of the United States, p.371.