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Oil versus gold

The lower Australian dollar is set to have big benefits for gold and oil exporters in the coming year, with prices for both commodities set in US dollars. Australia is home to many companies seeking and extracting oil and gold, but which one is best for your money?

Gold has been a magnet for speculators and investors for as long as history books can record. It is also arguably the world’s most enduring store of value. If the baby Jesus were to be born today it is entirely possible he would have still been gifted gold. But does that make gold-producing stocks an investment for wise men?

The big fall in gold prices seen earlier this year resulted in a slashing of gold stocks to what appear to be bargain prices. From big producers like Newcrest Mining (ASX: NCM) to smaller producers like Silver Lake Resources (ASX: SLR) the fire sale on gold stocks suggested everything had to go.

Gold stocks still look reasonably priced and rocketing demand for bullion which occurred as the price fell to around US$1200 per ounce, especially from India and China, suggests there is still a hungry market for the metal.

One of the well peddled arguments against gold is that it lacks uses that would cause future demand to increase meaningfully. While there is a limited industrial demand for use in electrical components, a key use for gold is jewellery. This demand may grow at limited levels as countries like China and India grow their middle-class.

Unlike gold, the demand for oil (the ‘black gold’) stems from one fundamental use as a source of energy to power our lives. Our reliance on oil may be slowly reducing, but global demand is maintained by growing populations.

Oil producers have benefited in the last six months from rises in the price of oil which resulted in some very positive full-year results from the likes of Woodside Petroleum (ASX: WPL) and Senex (ASX: SXY).

Oil companies in many cases have the added benefit of duel production of both oil and gas. Demand for gas is expected to grow strongly on demand from Asia, but also from Australia’s own domestic market as a forecast shortage of gas supply to the East Coast looks set to substantially push up prices.

Foolish takeaway

Oil definitely has the upper hand with strong, ongoing demand and the likelihood of increasing prices. This makes low-cost oil producers look more attractive as a long-term investment then the more speculative forces behind gold.

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Motley Fool contributor Regan Pearson owns shares in Senex Energy.

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