Today's Quiz: Which is the best investment in a recession: gold, silver, or platinum?

The answer, says James A. Gibbs, President of Five States Energy Company in Dallas, is "None of the Above."

Citing the 1996 edition of the Chase Investment Performance Digest, an annual compendium of investment facts, Mr. Gibbs points out that the evidence shows something quite unexpected. Over the last thirty years oil outperformed all major investments during recessions.

Yes, you read that right. Oil.

He also points out that oil prices are negatively correlated to stock prices, meaning that oil prices go up when stocks go down and vice versa. In fact, the relationship is pretty extreme and the visceral experience of "negative correlation" can provoke some very unpleasant memories. If you were a stock investor in 1973, the memory is of massive losses over a two year period. If you were an oil investor in 1982, the memory is of massive losses when the price of oil started to fall as the current bull market in stocks was born.

Small wonder, then, that Mr. Gibbs is suggesting to financial planners--- the kind of folks who worry about regression and correlation --- that some investment in petroleum would reduce the volatility of their clients' portfolios. Indeed, work by Arthur Budge, Jr., a financial planner who works with Mr. Gibbs, shows that while oil company stocks tend to move with the broad stock market, the value of crude oil and natural gas is negatively correlated, meaning that it actually moves up as stock prices move down.

Needless to say, moving these ideas is heavy going. After the limited partnership fiascoes of the eighties, few topics are greeted with less enthusiasm than direct investments in energy or any other type of hard good, correlation notwithstanding.

No so with the idea of stocks. The current conventional wisdom is that you can't own too much in stocks. Buy them as they go up. Buy them when they go down. Basically, we're supposed to buy stocks like people vote in some parts of Chicago, early and often. If you hear that the world is going to end and people are selling, buy even more. ( You'll make a killing if the world doesn't end.. and if it does end, your trades will never clear.)

To this enthusiasm for stocks, Mr. Gibbs has a simple response: be contrarian. Oil is cheaper today than it was before the first OPEC price increase in 1973.

It isn't cheaper in dollars. It's cheaper in stock.

To demonstrate, he points out that oil sold for $3.18 a barrel in 1970 while the Standard and Poors' Index was 92.15. That means you could buy 1000 barrels of oil with 34.51 "units" of stock. Only a few years later, with oil at 7.67 a barrel, you would have needed 85.04 units to buy the same amount of oil.

By 1980, with oil at $21.59 a barrel, you needed 159.03 units of stock to buy 1000 barrels of oil. Measured in oil, equities had lost 78 percent of their value in ten years. By 1985 the situation had reversed: oil prices were falling and stock prices were rising: you needed 114.02 units of stock to buy 1000 barrel of oil. Since then, the exchange rate between stocks and oil has continued to favor equity.

Indeed, in spite of the steady rise of oil prices in the last year, 1000 barrels of oil will now fetch less stock than it would in 1970. While the price of oil in dollars is up more than seven fold, it remains that oil is dirt cheap when measured by the current value of common stocks. Since 1980, oil has lost 75 percent of its value compared to stocks. The table below shows how that relationship has changed since 1970. Mr. Gibbs notes that the average oil prices comes from the Independent Petroleum Association of America and reflect domestic prices which tend to be lower than world average prices.

From Cheap Oil… To Cheap Oil In 25 Years

Year	Average Oil Price	S&P 500 Index	Units S&P500 per 1000 barrels of oil
1970	$3.18	92.15	34.51
1975	7.67	90.19	85.04
1980	21.59	135.76	159.03
1985	24.09	211.28	114.02
1990	20.03	330.22	60.66
1995	14.62	615.93	23.74

Source: James A. Gibbs

Does this mean oil prices will inevitably rise to $90 or $100 a barrel?

Not likely. But in 1970, stocks were a favored investment, mutual funds were hot, and institutions were starting down the path of the one decision, "nifty-fifty" stocks.

And no one worried about oil prices.

Things change.

Note to readers: To see columns written since 1981 on "The Barrel Standard", check the Special Collections.

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File Name: 961110SUDallas Morning News file date: 11/10/96---SUNUniversal Press Syndicate file date: same © Dallas Morning News, Universal Press Syndicate, 1996