United States Oil (NYSE: USO), SLV (NYSE: SLV) and SPDR Gold Shares (NYSE: GLD) continue to decline, confirming the thesis of legendary investor George Soros that once the Federal Reserve calls a halt to its program of financing the budget deficit (QE2), interest rates will rise. Soros expects this to happen as the Federal Reserve has been buying 70 percent of Treasury bonds in recent auctions, keeping interest rates low. USO is particularly vulnerable due to a slack demand for oil for basic economic needs.
When the Federal Reserve supposedly stops buying next month, interest rates will have to rise to attract the necessary buyers needed to finance the US budget deficit. When interest rates rise, the dollar will strengthen. A stronger dollar will attract more funds, deterring them from going into commodities. After QE2 was implemented last year, SLV, GLD and USO all rose in value, along with small cap oil stocks such as Veneco.
Small cap stocks offer a better way for investors. Veneco Inc. (NYSE: VQ) has followed the ups and downs of oil in is share prices, as example. Now trading under $14 a share, off a year of almost $23, Veneco operates in California and Texas. As a result, its fortunes are not tied to unrest abroad. When turmoil overseas sends oil higher, however, Veneco’s stock price will rise too.
USO should continue to fall as the economic demand for oil is not strong enough to justify the current price. A recent Goldman Sachs (NYSE: GS) stated that oil was overpriced by about $20 a barrel. Exxon Mobil (NYSE: XOM) Chairman and and Chief Executive Office Ray Tillman recently testified before Congress that oil should be trading under $70 a barrel, based on supply and demand. As such, USO and Venco should go much lower in price. This will offer buying opportunities in USO and Venco as demand for oil fwill pick up due to the growing economies in China and India and the return from The Great Recession of the economies of the United States and Europe.
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