Oil Prices to Dip on Dollar's Rally

• Europe is broke
• So the dollar is rallying
• And some commodities are going on sale

Ireland is broke and the long-term yields on the country's bonds are skyrocketing.

I'm sure Portugal and Spain aren't far behind. In short, the Euro is weakening.

And while that's certainly not good news for Europeans, Americans, or anyone really, it does mean that the dollar should continue to rally.

Already we've seen the dollar index advance from year-to-date lows of 76, up to the 78 level.

Here's why you should care:

In the short-term nearly all commodities tend to trade inversely to movements in the dollar index. So a falling dollar buys less and less gold, for instance – and the dollar denominated price of one ounce of gold rises.

But, a rising dollar tends to push the price of commodities down – because it buys more and more of the same ounce of gold, and the dollar-denominate price of gold falls.

Over the long term it doesn't matter. The dollar can rise, fall, go to zero - or a billion. It won't matter. Because the dollar index is really just a mirror, reflecting the dollar's different exchange rates of a basket of other paper currencies: the Euro, the Japanese Yen, the British Pound, the Canadian Dollar, the Swiss Franc, and the Swedish Krona.

So, it's entirely possible for all of these currencies to fall in tandem over a long period of time, and although the dollar index would remain flat, the price of gold would rise.

All of these currencies are backed by nothing more than their promises to pay back sovereign debt slower than the rate of inflation.

Europe is already having trouble with this promise, which is why Greece bond rates skyrocketed earlier this year, and it's why Ireland's bond rates are soaring today. It's why Portugal recently threatened to abandon the Euro.

The Atlantic Ocean won't insulate us from the effect of central bank debt woes. But for now, the dollar is holding steady while the Euro wavers.

And it could mean we have a shopping spree coming down the pike.

Already, silver and gold have retraced following the dollar's strength. Silver is down 6%, while gold fell 3% since November 4^th lows.

That's a good enough dip for me. I'll use this opportunity to buy more physical gold and silver of course - but I think there are even better opportunities coming for a certain few commodity securities.

Specifically, I'm interested in oil companies.

Take a look at this six month chart and you'll see that the dollar index and oil are almost mirror images of each other.

Each drop in the dollar index results in a nearly identical movement upwards in the price of oil, and visa versa.

It's easy to understand why: the United States is currently the single largest market for oil.

In any event, the stronger the dollar, the cheaper the price of oil will get. And that means we could see some nice discounts for our favorite stocks.

Before I give you some stock ideas to benefit from this trend, I want to reiterate: I'm using the dollar index as a short-term buy-signal indicator.

In the long-run, I believe the dollar will go to zero. It's also pretty clear that we may soon be dethroned as the largest single oil market. In the long run, maybe Martians will invade or we'll discover a way to turn seawater into BMWs - who knows!

As John Maynard Keynes said, “In the long run we are all dead.”

So how can we profit now given the likelihood of at least a short-term dollar rally?

In the past I've recommended buying shares of ExxonMobil XOM as well as Noble Corp NE but right this moment, I'm a little more interested in a blue-chip oil company selling at a substantial discount to its peers.

I'm talking about Conoco-Philips (NYSE: COP).

Right now, COP is selling for less than 8 times trailing earnings. They're cheaper than any of the other large-cap oil producers and they pay the highest dividend. So by buying Conoco-Philips you're paying the lowest price for earnings, and you're getting the best dividend.

On July 26^th, I recommended picking up shares of Exxon for similar reasons. They were cheap and they were paying a competitive dividend.

Exxon shares are up 18% since my recommendation.

Do your own research of course (always!) but I think that you'll see similar share price appreciation if you take this opportunity to buy COP on any weakness as the dollar rallies.

Good investing,

Kevin McElroy

Editor

Resource Prospector

disclosure: I own shares of Exxon. No other positions as of this publication.