Why Betting on Oil Over Gold Could Pay Off Big in 2025

December 11, 2024 at 08:15 AM EST

Oil vs. gold investing

The premium on gold’s price might be cooling off, especially as the geopolitical conflicts start to cool as nations gear up for the new United States administration. This is why gold’s price has ranged and struggled to break above $2,700 per ounce, making other discounted commodities, like crude oil, a better buy when seen from a risk-to-reward setup.

In the energy sector, plenty of stocks could use a boost, as their prices today are at rock-bottom valuations. At the same time, some exchange-traded funds (ETFs) in both gold and oil are worth shifting portfolios in and out of right now, besides considering some of the stocks in today’s list as potential buys and sells in this same process.

ETFs like the United States Oil Fund (NYSEARCA: USO) could be great buys right now, especially as the second week of December 2024 kicks off with a 2.3% rally. Meanwhile, the SPDR Gold Shares (NYSEARCA: GLD) only rallied by 1.4% and is struggling to keep breaking through, which makes names like Barrick Gold Corp. (NYSE: GOLD) one to consider taking chips away from, and oil names like Transocean Ltd. (NYSE: RIG) with Exxon Mobil Co. (NYSE: XOM) being buys instead.

Why the Gold Premium Could Fade in the Coming Months

Over the past few quarters, gold prices kept climbing on fears of trade tariffs and the potential inflationary effects they could have on the United States economy. On top of this view was a so-called “war premium,” considering the broader flight to safety behavior sparked by conflicts in the Middle East.

Now that the new United States administration is working to ease these conflicts, gold prices have backed off from previous highs, with a sharp rally to start the second week of December 2024 as Syria overthrows its government. However, the broader landscape looks much cooler than a couple of quarters ago, so gold is not breaking past resistance.

More than that, Bloomberg reported that gold sales have plummeted in China and India, two of the world’s largest retail markets for gold, and a somewhat leading indicator of how the broader public is perceiving gold.

This might be the reason why investors can see those at FMR LLC decrease their Barrick Gold holdings by 16.6% as of November 2024, or the net $2.5 billion of net institutional outflows from the gold miner as well.

Though exiting gold may be premature, investors have a way to hedge their position by pairing a gold short with a long in silver. For the SPDR Gold Shares ETF, the same trend is spotted regarding institutional sentiment.

As of November 2024, Toronto Dominion Bank and Barclays have reduced their exposure to the SPDR Gold Shares ETF by 16.7% and 42.7%, respectively. Views are changing on many levels, and investors need to understand that as tensions decrease and gold demand from retail also comes down, prices are at risk of a major pullback in the coming months.

Oil Prices Offer a Superior Risk-Reward Setup for These Energy Stocks

Considering that oil price action has remained strong around the $69 a barrel level, investors are now back to the point where markets will decide whether bulls or bears are in control of the commodity.

Compared to gold prices, oil has a lot more upside with a lot less risk, probably one to two dollars of risk at this point.

Buying the United States Oil Fund ETF is one thing; investors will probably get a one-to-one setup as long as oil prices rally, and that’s fine. However, stocks higher up in the value chain offer a much bigger upside for those looking to make a dent in their portfolios.

Such a stock can be Transocean, which leases equipment for oil producers and explorers.

In terms of earnings, it will get paid the most and first.

That’s why analysts at Susquehanna have reiterated their Positive ratings on Transocean stock and also placed a $6.50 share price target on the company, calling for as much as 62.5% from today’s prices.

Given that the stock carries a high beta of 2.7 today, the volatility might be too much for investors to handle, and that’s where Exxon Mobil stock comes into play.

With a much lower beta of 0.9 and still double-digit upside, this $502 billion behemoth in the oil industry is the happy medium between Transocean and the ETF.

Those at Morgan Stanley have a view that would bring Exxon Mobil stock to a high of $140 a share, calling for as much as 23% upside from today’s stock price.

Another gauge of this trend can be taken from the company’s 7.9% reduction in short interest, which shows signs of bearish capitulation in the face of these optimistic trends for oil-related stocks.

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Why Betting on Oil Over Gold Could Pay Off Big in 2025

Why the Gold Premium Could Fade in the Coming Months

Oil Prices Offer a Superior Risk-Reward Setup for These Energy Stocks

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