Skip to comments.Gold-Oil Ratio Spiralling Downward (630/74)
Posted on 07/09/2006 6:30:32 PM PDT by DebtAndDelusion
With oil now hitting record highs and gold well off mid-May levels, the gold-oil ratio continues to shrink. Today, one ounce of gold only buys 8.57 barrels of oil - a ratio of 0.11.
Oil hit a fresh record high of $75.78 a barrel today, boosted by strong demand in the United States and global tension ranging from Iran's nuclear work to North Korea's missile tests.
Prices drew early support from a U.S. government report yesterday showing gasoline demand grew by 1.4% in the last four weeks from a year ago, with summer driving months still head. But rebel attacks in Nigeria, the world's eighth-largest oil exporter, have shut almost a quarter of the country's output and the Iranian nuclear row has raised fears of supply cuts from the worlds fourth largest oil exporter.
Oil is up 23% this year on these geopolitical tensions and a flood of investment fund money into commodities, and many analysts are saying high oil is hear to stay. It has rallied from below $20 at the start of 2002.
In the meantime, this year gold soared to a high of $730 per ounce on May 12th, its highest in 26 years. But just as quickly as it sprinted to record highs, the yellow metal plummeted by $190/oz to a low of $542/oz just four weeks later.
Despite gold regaining some of its luster of late, the gold-oil ratio continues to slide. In May, using the average price of gold and oil for the month, the ratio was 9.57 barrels per gold ounce; the ratio averaged 8.4 bbl/oz in June. So far in 2006, the average gold-oil ratio is 8.3 bbl/oz or around 0.11 gold ounces per barrel of oil
The long-term ratio has averaged about 17 bbl/oz since 1970. So far in 2006, the average ratio has been 8.7 bbl/oz.
Using the 36-year ratio, the suggested price for gold is $1,258/oz with oil at $37/bbl. Using the 2006 average, gold comes to $644/oz with oil at $72.9/oz - pretty close to todays price differential.
Crude for August delivery climbed as high as $75.55 a barrel, to a set a record on the New York Mercantile Exchange for a front-month contract. It then pulled back to a close at $74.09, down $1.05.
Today, gold closed down $1.50 for the day at $634.80/oz on NYMEX. However, it gained 3.1% overall this week on tensions in North Korea and 4.8% last week on buzz that the Feds interest rate hike campaign is over.
We can print as many dollars as we need while they are running out of oil. Not that they don't know this a lot better than us...
The problem is the point where they won't take dollars anymore and demand gold for crude. Then we have a situation. Anyway, the gold-oil ratio is something I don't see discussed too often on this forum. In theory this revaluing of the ratio might be a price signal confirming oil shortages in the near future. As we get ready to go volatile in the coming weeks it may help in understanding the true price structure dynamic.
What "coming financial meltdown"?
The "meltdown" where everyone stops paying their mortgage at the same time, causing the banks to all fold simultaneously ...
Both commodities are market driven.
Let me say that again - MARKET DRIVEN.
Comparing the price of gold to the price of oil is like comparing the price of cantaloupe melons to ice cream. NOT CORRELATED.
Gold still looks dirt cheap at 630. That means for the average American to own an ounce of gold they will be spending about 640+ for a Krugerrand or 660 for an American eagle if they know how to negotiate. A little more if they are first time buyers and don't know how to haggle like they are in a Teheran bazaar.
You asked "What coming financial meltdown?" and that is a fair question. Some of the nephew's colleagues at the University like to have that discussion and he tells me after several beers half of them agree it will be a hyper-inflationary tsunami while the other half swear it will be a deflationary collapse. The one thing they all agree upon is that its coming.
Those in charge have created too much money -- the asset bubble of all asset bubbles. Except of course "dollars" are not assets (unlike gold) but merely debt instruments. I guess in simple terms, there is so much debt out there that there will never be enough money created to service it at some point -- let alone pay it back. Massive systemic-default is the liquidity crisis magnitudes beyond the central banks' ability to "soak up excess liquidity."
Debt trap dynamics reach their tipping point and then accelerate. When it happens it will move around the world with lightning speed.
Gold has been man's only protection from the central bankers since John Law rode into France. The day the average Joe learns what has been going on he is going to be some kind of upset. If he has bought gold at 450, 630 or even a thousand he will survive. If not he just may go hungry because at some point those Krugerrands and American eagles will get scarce at any price in terms of paper "dollars"
Of course you will always be able to exchange Morgans or Peace dollars for gold. But that's another story for another time. Believe it or not there was a time in this country when a dollar was solid and meant something.
There's a reason those darn Asians are buying all the gold...
It held within a few pennies of 1:1 from the time I was in high school till the time I stopped eating Big Macs, which was at least 20 years later.
Unfortunately, I don't know what a Big Mac goes for these days. Well, I withdraw the word unfortunately.
Actually, this is a very good indicator. The Oil/Gold ratio has gone below 10 three times in the past 30 years. And gold has gone up an average of 15.5% each time the following year. Now, I am not saying this is a sure bet. However, the probability of Gold going up is very high. In so many words, it is a low risk investing idea.
In the long run, everyone's dead, too. (I know, I know; I really shouldn't be quoting Keynes on an economics thread.)
" It held within a few pennies of 1:1 from the time I was in high school till the time I stopped eating Big Macs, which was at least 20 years later.
Unfortunately, I don't know what a Big Mac goes for these days. Well, I withdraw the word unfortunately."
Well, since Big Macs ARE a petroleum product, this must be some Soros driven devaluation of the Mac caused by dumping the Euros he thought he would corner. Or something like that.
Rather than go on the gold standard for our currency maybe we should go on the oil standard.
Iran is already hording gold and proposing euros for oil. Iran was supposed to go live with their own oil market in March, but then it was pushed back to June or July.
I didn't read the link. But I do have a hunch about the crude oil market being, if not cornered, than certainly manipulated. It has something to do with the world's second largest exporter, who will soon be selling the energy company it stole to the public just when it's assets are at a nominal all time high. Oh, and they happen to be hosting the G8 meeting.
"Comparing the price of gold to the price of oil is like comparing the price of cantaloupe melons to ice cream. NOT CORRELATED."
Not really - all prices are correlated given no shifts in the supply and demand curves.
There is a big shift in the demand curve for oil because of all the saber rattling since 9/11.
It can't keep up forever.