What Is The Ratio Between Gold And Oil Based On?

March 14, 2008 | By | 2 Replies More

The ratios between gold and oil is based upon the fact that gold has been, and arguably still is, the ultimate and indestructible form of purchasing power and oil has been the most important commodity involved in the progress of civilization in modern times.

With few exceptions over the years one has tracked the others´ ups and downs to this day. The Middle East wars and crises of 1974-6 being the most notable years when the pattern was broken.

Of more to the point, is there a guide to investors in the behavior of the ratio between the price performance of the two commodities over the years?

 

In 2005 one ounce of gold would have bought 6.6 barrels of oil, an extreme low compared with the long-term average of circa 15 barrels for one ounce.

Of course today we are seeing both oil and gold at all time highs in dollar terms unadjusted for inflation. The flight to gold as paper currencies, with the greenback in the lead, continues to lose credibility and seems set to continue. Oil supply, according to the analysts, has passed its peak and is getting ever more expensive to get out of the ground and the cost is being passed on to the consumer.

At the time of writing the ratio has risen to 9.1:1. The question is then, if there is a pattern to the ratio between the two, which one will be the catalyst to revert the ratio to the norm? Is the norm the long term historical average of 15:1 or is 7-8:1 more realistic? Will it be oil taking off to the stratosphere or will the gold run become exhausted and the price drop significantly?   

Vice versa or status quo?  

Whether there is any justification in assuming that the ratio between the two is  an important issue to take into account when making an investment judgement is a matter for debate. This writer believes that any historical similarities in the ratio that are evident are no longer valid.

The change in worldwide economic activity, the diminishing status of the US dollar and other fiat currencies, and the gradual ascendancy of the emerging nations, Russia and the oil producers since the start of the new millennium have created a whole new scenario.

For the time being we will go along with the thesis that gold will follow the progress of oil. It is not the leader, and we do not expect that any discernible correlation will occur to guide the market, just the general ups and downs.

Moreover we consider that gold will be far more vulnerable if a meltdown occurs in the general stock market, a distinct possibility according to some analysts who are suggesting that the US, and that means the rest of the Western developed economies, may enter a recession similar to the great recession of the nineteen twenties.

The demand for oil, on the other hand, is unlikely to diminish. Already there is talk that demand is now outstripping supply, production is not keeping up the pace, and proven reserves are getting scarcer. The result an ever increasing cost that gold is unlikely to match.

Now silver is another matter!  

 

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Comments (2)

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  1. ed kahle says:

    I like your 3/14 article concerning gold and oil ties. I don’t have a comment, but rather some questions.

    I’m an entrepreneur/business owner of numerous businesses for over twenty years myself (third generation in my family) and have always invested and secured my wealth in traditional means such as stocks, mutual funds, real estate and most importantly, reinvesting in my businesses and maintaining cash flow. After the last eight years of this and slowly watching everything stay stagnant if not loosing value I got fed up and very concerned and sold off my entire stock portfolio on 3/14. I’ve concluded that I want to invest into precious metals with these funds and I’m really a green horn in this area.

    I’ve been heavily studying our economic and political situation over the last eight months to try to figure out what’s going on and what to do. Please correct me if I’m wrong, but our political situation seems to be the sole directive to investing as opposed to market conditions and stability of companies to invest in.

    I’ve discovered that Venezuela, Iran and Iraq are the three large oil producing nations that are not part of OPEC and ironically the same three nations that our government has problems with! In 1971 president Nixon repealed the ban on gold that Roosevelt placed in 1933 and convinced the world to remove all gold backing from their currencies, thus creating a limitless supply of cash and the hidden tax of inflation and the license for governments to grow by leaps and bounds.

    I’ve seen Lindsay Williams video on you-tube about Gull Island in Alaska (I will be reading his book soon). He says that Kissinger cut a deal with the OPEC nations to set the barrel price with the stipulation of them buying back our deficit through American dollars. The world bank and the IMF are the middle man here before the product reaches the refinery’s and retail markets.

    This whole scenario uses the cost of a limitless supply of oil that we as consumers pay to be a tax to pay for our deficit through the bankers who hold our national debt. The limitless supply of oil is the backing of our limitless supply of fiat money.

    It seems to make logical sense as our unimaginable deficit could never be paid down with our income taxes as it now sits. If our taxes are to pay for the deficit, than logically, we should be paying ten times or more taxes! He also says that Iran has threatened to flood the markets with cheap oil.

    This would cause oil prices to go down which in turn would do three things, cause products to be cheaper, the dollar to gain value and gold to come down. This would be threatening to our government and the world bank, probably causing us to go to war with Iran to stop them from flooding the market with cheap oil.

    If we go to war with Iran, than I would assume that oil and gold would also go back up and the dollar down. If we do get into a war with Iran, it more than likely would cause our dollar to crash especially considering our current economic conditions both nationally and world wide and gold to run vertically up. If our dollar crashes, our government could reinstate the ban on gold to use it to back our currency and cause it to be worthless.

    Likewise, the central banks of the world could flood the markets at any time with gold and bring the price down. After all, they have a big stake in this with our deficit! It’s possible they could do this soon to get the stock market back up and get confidence in the dollar that they need to pay for oil. Does any of this make sense or am I crazy?

    Check out Lindsay Williams on the web and see his video. Let me know if what he says is true or could very possibly be true. In the meantime, I’ll be reading everything you have on your site and studying metals before I invest very soon.

  2. John says:

    Thank you for sending us your thoughts and queries. Keep a close eye on gold after the last 2 days price action.

    Buying the dips could soon come into play.

    I hope that our response gives you further food for thought.

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