Oil, Gold Stocks: Rare Opportunity Found

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By Frank Holmes

NEW YORK ( U.S. Global Investors) -- The MSCI Emerging Markets and the S&P 500 indices have increased in double digits since the beginning of the year. Investors should be thrilled, but instead of cheers, the markets are hearing crickets. Many have been asking, where are the investors?

Since January 1, another $12 billion left U.S. stock mutual funds, while about $100 billion went into bond funds. This continues a mutual fund outflow trend that has been ongoing for several months now.

After leading markets since the rebound began in 2009, natural resources and gold took a break while severely punished stocks saw a big bounce in the first quarter of 2012. Taking a look at the returns below, the S&P Global Natural Resources Index rose only 4% and the NYSE Arca Gold Miners Index lost 9%.

As investment managers, we continuously weigh the evidence, dissecting macro factors in the market and comparing historical data. We believe this is the best way to find the next opportunity for our shareholders. Using history as our guide, we compared the performance of oil and gold companies against the results of the underlying commodities over the past three years.

West Texas Intermediate crude oil has seen a tremendous rise over the past three years. In April 2009, the price of oil was $46 per barrel; today, it's $104. The SIG Oil Exploration & Productions Index closely followed the rise of Texas tea from April 2009 until August 2011. That's when the disparity between oil and oil stocks began to gradually increase.

Over the past three years, the price of oil and the index have had an average ratio of 0.21. Currently, it's 0.26.

That may not seem like a big difference, but today's ratio represents a three-year high and is a 3.13 standard deviation event. This means the divergence between oil and oil stocks is in "extreme territory" and, under normal assumptions, there is a 99% probability that the gap will close. Either the price of oil should come down or oil stocks go up, or a combination of both.

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