Gold/Oil Ratio Very Interesting

Back in 2004 and 2005 I posted that the Gold/Oil ratio (GOR) was at an extreme. I said then:

Five times since 1975, the GOR has been below 10 since 1975. Each time the GOR went back to at least 15.2, it’s average. Now for the sixth time we are below 10, currently at 6.6. With Oil at $65, a GOR of 15.2 puts gold at $988. If I were selling oil for USDs, I would take the USDs and buy Gold. If things work out for the sixth time, it would be like selling Oil for $130. It may be the best trade in the last 35 years!

So what has happened since then. Oil was $65 and Gold was at $429. At the peak in May, 2008, Oil was over $140 and Gold was $925 down from its peak over $1,000. The USD fell from about 90 to around 70. Clearly, it was wise to sell dollars and both Oil and Gold doubled.

I was reminded of that August post when I read REVISIT OF THE TIGHT-BOUND RELATIONSHIP BETWEEN GOLD AND OIL by John Lee, CFA Portfolio Manager, Mau Capital. The situation has changed dramatically. Gold closed Friday at $837 and Oil closed at $42.36. That is a GOR of 19.75.


Click on image to enlarge

I am not suggesting that one should sell Gold and buy Oil, but IMO, it might be time to look at Oil for a trade. Oil has fallen week after week from $147 to below $40 without any major rally. Unless, civilization ends, we are going to be using oil and the price is likely to rise even if only to $63 from here. BTW, 20 times $63 is $1206 for Gold.

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