There’s no faster way to stimulate inflation fears than pouring new money into the economy. After the Fed announced it would do just that, via a $600 billion bond repurchase program, the price of gold spiked, the dollar dropped, and energy funds, beaten down through the summer, suddenly started to look a lot more attractive.
Along with metals and other commodities, energy stocks have, over time, been an effective counterbalance to inflation. For most companies, inflation drives up costs faster than they can raise their prices, which cuts into profits. But for oil and gas producers like ExxonMobil (XOM: 70.48, -0.51, -0.71%) and EOG Resources (EOG: 92.43, +0.38, +0.41%), inflation actually boosts their bottom line: Because energy supplies are limited, demand is relatively constant, and prices fluctuate daily, these firms can pass price increases along quickly.
And, unlike gold – which at $1,400 per ounce is now 28% more expensive than it was a year ago – energy is still a relative bargain. After the Deepwater Horizon oil spill in April, BP (BP: 43.04, +0.05, +0.11%) shares lost 55%, and the Philadelphia Oil Service Sector Index dropped 30%. The end of an offshore drilling ban in mid-October helped the sector recover a little of that lost ground: The index climbed 9.3%, and BP is down just 28% for the year. Year-to-date, energy stocks in the S&P 500 are up only 8.6%, lagging the index’s 11.6% total return. (more)
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