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What Is The Gold-Oil Ratio Telling Us?
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
Based on historical gold-oil ratios, oil appears extraordinarily cheap right now.
One way to establish if a commodity or asset is relatively expensive or inexpensive is to price it in something other than a fiat currency--for example, gold. Gold goes up and down in value relative to other commodities and fiat currencies, so it is itself a volatile yardstick. Nonetheless, it provides a useful measure of the relative value of gold and whatever is being measured in gold--in this case, oil.
The prices listed are approximate, i.e. rounded to averages in the time frame listed. Of the various measures of oil, I am using WTIC.
According to SRSrocco REPORT, the average gold-oil ratio in the period 2000-2014 is 12. That is, on average, one ounce of gold bought about 12 barrels of oil.
For historical context, in 1976, following the first oil-shock in 1973, oil was $12.80/barrel and gold was around $124, for a ratio of 9.7.
In 1986, the average price of gold was around $368 while oil fell to $14/barrel, for a ratio of 26.3.
At gold's peak above $1,800/ounce in 2011, oil was around $90/brl, for a ratio of 20.
At oil's peak above $140/barrel in 2008, gold was around $950/ounce, for a ratio of 6.8.
As a rule of thumb, oil is relatively expensive (and gold is relatively inexpensive) when the ratio is below 9, and oil is relatively inexpensive (and gold is relatively expensive) when the ratio is above 20.
When oil fell below $55/barrel a few days ago, the ratio reached 22. By historical standards, oil is cheap.
Here is a listing of various highs and lows in gold and oil:
Oil priced in gold: how many barrels of oil can be purchased with one ounce of gold?
2000: Oil $30/brl, gold $275
Ratio: 9.2
Ratio: 9.2
2006: Oil $70/brl, gold $600
Ratio: 8.6
Ratio: 8.6
2008: Oil $140/brl (at the peak), gold $950
Ratio: 6.8
Ratio: 6.8
2011: Oil $90/brl, gold $1,800 (at the peak)
(note that oil traded above $100/brl earlier in 2011, but at gold's peak was around $90/brl)
Ratio: 20.0
(note that oil traded above $100/brl earlier in 2011, but at gold's peak was around $90/brl)
Ratio: 20.0
2014 (1st quarter): Oil $105/brl, gold $1,300
Ratio: 12.3
Ratio: 12.3
2014 (current): Oil $55/brl, gold $1,200
Ratio: 21.8
Ratio: 21.8
Here is a chart of gold from 2012 to the present:
Here is a chart of oil (WTIC) from 2012 to the present:
And here is a chart of the gold-oil ratio from 2012 to the present:
While the gold-oil ratio exceeded 25 three decades ago, in the era of rising demand from the emerging markets of China, India and other nations, the ratio has only touched 20 when gold was trading above $1,800/ounce.
Based on historical gold-oil ratios, oil appears extraordinarily cheap right now. Could oil fall further? Of course. Could gold go up or down? Of course. There are a great many factors that influence the ratio, which is simply a short-hand method of measuring the relative value of two important commodities.
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Gold Bitchez
Paper commodities and Fx pairs using printed money via "Not-for-profit" traders are manipulating all of these "Markets". Neither Charts nor fundamentals really mean very much of anything in these circumstances? They will do exactly what they want to do and if, in the meantime, the Charts and the fundamentals don't make sense, they don't give a shit.
My sock drawer was not available for comment.
Given what the BRICS are planning in a gold-for-oil exchange (petrogold) scheme, this number should take off.
First, the LBMA paper gold pricing rig will have to blow.
Suspect that is coming soon.
Sell gold to buy oil futures, got it!
gonna buy some oil and have a boating accident
...oh shit
Well said Phili!
In the age of full out manipulation of virtually everything, graphs of manipulated data and relationships between manipulated data hardly seems meaningful. (More like a waste of time).
Having said that, the manipulators know WS and their algos watch and respond to such data like Pavlov's dog hearing the dinner bell. Arrf.
wow. Just like my reply to Chuck, wtf is the point?
The benchmark I use, AND, from actual experience, it ACTUALLY works, is, the humidity and dew point ratio on a full moon day (not night), under the spaghetti tree in my backyard.
http://www.macrotrends.net/1380/gold-to-oil-ratio-historical-chart
The concept that gold could be expensive is of course verbotten...
In relation to US debt, since 1971, it's not.
1971 US debt $390 billion. Gold $35/oz. Now, $18 trillion, 46 X's.
$35 X 46=$1615/oz. 25% discount! It went 50% at other bottoms.
who cares!
Ahhh price discovery! I saw her once above the hills over Lochhness. Beautliful creature. I forgot my camera...so you will just have to take my word for it.
both worthless (sic)
What a pointless article.
Here a guy presents a clear case as to why you should go long oil and all zh commenters can do is trash it and call it "worthless".
It's a disease of the mind.
BTW, oil is on an epic Gartman Fade right now. I pointed out how bearish he had become.
Indeed. If you're not a day-trader or an insider, reversion to the mean is pretty much the only trading strategy that works. Looking at historical ratios makes sense.
I stack PMs. If I had some dry powder, opening a spreadbetting account with a company that carries positions overnight (like CMC Markets) and shorting gold and going long oil would make sense; cost of carry is low, bid/ask spreads are narrow, shorting gold is a hedge for my stack, and going long oil is a nod in the direction of acknowledging that the long term trend for oil is up, at least in fiat.
If anyone thinks oil is no longer necessary in our economies then please speak up. Catch a falling knife? maybe you can wait until the charts indicate oil has bottomed; it's only a question of when, not if. US shale production will plummet at these prices, and supply and demand will eventually do its usual thing.
TPTB can manipulate gold and silver for so long and so easily because the stock:flow is so high. Oil? Not so much.
"Could oil fall further? Of course. Could gold go up or down? Of course."
Yep - clear case as to why you should go long oil. Just like in November 2012 when the gold/oil ratio was at 20+ (meaning oil was cheap) and the oil price was $85. How I wish I had gone long oil then.
Oil may well be cheap now - Ihave no idea. But I certainly wouldn't look at daft ratios like this one. I humbly maintain that the article is pointless.
It is essentially worthless, and is basically a distraction, unless you are buying/selling oil with/for gold.
The global oil supply can be manipulated with a simple policy change. The global availability of gold is fairly constant year/year, and while supply could be held back, it would be extremely difficult - if not impossible - to meaningfully increase the availability of physical gold.
I compare my assets against cranberries.
I like cranberry sauce.
Gold could go up or down. Did Janet YELLEN write this ???
It is data dependent and something that we are watching closely.
Now is a great time to buy or sell oil...
Clearly not Greenspan...
Don't worry, Zero Hedge, paper gold will be playing catch up on the downside in due course.
Or gold is expensive. Which is it?
It's as good as gold.....whatever that's worth.
belangp recently posted a good video addressing this: https://www.youtube.com/watch?v=pi4XkDA-FQ4 good stuff on his channel overall.
Supply > Demand
Derp...
They are hatin' on Putin is why.
With NIRP all over the planet gold should be above $3k. Guess why it's not.
Cause you can't live all over the world at once, in other countrys it just might be that much, but after the manipulated currency ratio's, it still comes out to about the same. You have to risk moving physcial gold to other country's to be the one to profit. Get caught with it at the border, you only go to jail. But the system is fair for all.
"measuring the relative value of two important commodities"
LOL ~ in my view
oil = 'commodity'
debt = 'currency'
gold = 'MONEY'
But I guess if you keep calling gold a 'commodity' over a long period of time, people eventually treat it as such [whereby it becomes easy to STEAL it from them]
More to the point, oil is in fact, calories available for consumption. If you have calories to burn, you can actually do real shit and actually have a real economy.
If you want to go that route, I'd describe oil as tradeable 'heat/energy' units, which largely REDUCE the human expended heat/energy units required to, down the chain, fill the mouths & stomachs with potential edible heat/energy units.
But at that point we'd be wasting heat/energy units in the endeavor of splitting hairs.
I like stupid metaphors. So what your saying is that the fat man is the best equipped? Got it.
Isn't it amazing that Gold has been pretty consistently around the $12-1300 for 18 months now, despite all the fluctuations in other areas of the markest, and despite surging for Lord knows how many years before that?
Rather gold is too rich. Fair value is 700
Apostle of the prophet Jon Nadler I see.
If you had to bailout the American public's stake of 303 trillions in derivatives with gold.....how much would it have to be worth?
If the US indeed holds 8100 metric tonnes, just shy of 1.2 million US dollars the ounce, e.i. 3 orders of magnitude higher as is right now.
I'll happily buy ALL the gold you have right now for $700.
What? You don't have any?
I thought not...
If there's any left.....I'll take it.
you'll need a neoprene suit & some O2 tanks
China and perhaps India, Russia, and private individuals, etc. are actually paying well over spot for physical gold.
And the price of oil has never had much to do with demand, of course.
What might be interesting to plot is how much volume of oil is being taken out of the ground [or refined] and how much physical gold.
While the ruble and relatively cheap oil would seem to be the more proximate causes, maybe along with more printing in a few months from the ECB {?} - it seems fair to ask if the better thing to look at is increasing gap between paper gold Ks and verified physical.
Or what the price of 'gold' is in the market versus what they're paying for it, generally in dollars, by China, Russia, India and others.
Just spitballing...
Or gold is extraordinarily expensive.......
^
Or gold is extraordinarily expensive
That's why they call it gold.....it's been that way for years.
Or Gold is really cheap and oil is fairly priced...
Or short gold; long oil.
Why do I get this feeling you're not concerned about my future?
Gold trying to reflect the real value of USD, oil not reflecting the vast over printing of USD. Artificial market mismatches.
Or gold is expensive. Interest rates are going up, after all.
That's funny, I thought I had read somewhere just this morning that rates had gone negative!
Thanks for your insight :-)
Gold is very cheap relative to increase in M2. Gold will retrace to 1800+ once TPTB lose control...or give up.
Oil is even cheaper relative to USD currency dilution...oil to find its relative value when USD is outed.
Chaos coming...gold a life vest.
Of course oil is cheap. That's the definition of a crash - things get cheap. That doesn't mean it's time to buy oil companies. Maybe wait a couple months and see what happens. I'm not buying any oil companies until the junk bond market starts recovering.
or gold is expensive - gold monthly closed at 1211 on Nov 30 - today it's 1205
http://bullandbearmash.com/chart/spot-gold-monthly-retraces-months-usd-s...
deflationary forces pushing down on commodities should drive gold lower - as forecast
It is telling you that physical oil is the world's real reserve currency asshat.
its called petrodollar system. oil is the reserve, pricedin dollars. oil is consumed so new dollars are required all the time---may be part of reason $ jumps whenever the printing press slows slightly.
The so much systemic risk out there aka multi trillion derivitives ticking, extreme currency dilution, geopolitical risks.....the desire to own real assets and be out of certain currencies might take hold.
Who needs "technicals and fun-der-mentals"? Isn't this the "trade" Gartman and his pals climb into every now and then? Does the phrase, "Fade the trade" mean anything to anybody? $29.95 gets you priceless fade opportunities.
www.traderzoo.mobi
A buddy of mine opened a cash for gold company a number of years ago. Here is what he told me. "People send me a thousand dollars and I give them back five hundred, and they're HAPPY"!!!! People are just plain ignorant.
The sad fact is that the american public have been transformed into ignorant Go USA fanboy exceptional idiots.
The second sad fact is that they were intentionally dumbed down by a calculated ZWO media campaign over decades and generations by the people who own the media, who are the same people who own the banks and the politicians, and now the world.
Now the ZWO gods on earth order the puppet dictator to add 50 million illegal immigrants just to dumb the mix even more.
So now they can have their way the drooling zombies just as they told us they would 200 years ago and they can't even comprehend the actual issues because they've been stupified.
Now the next generation gets a ZWO communist core education.
Enjoy.
Former Warner Brothers Chief Barry Meyer Joins Board of Federal Reserve in San Francisco
http://variety.com/2014/biz/news/former-wb-chief-barry-meyer-joins-board...
Not sure which is more ridiculous, 500 points on the DOW, 1000 on the Nikki in two days, or someone still throwing charts at us to explain it all...
One sided thinking. Maybe Gold is extraordinarily expensive?
.... What does glorius Yellen have to say about it and do the Saudis agree...
At this point I would consider shorting some gold.
this is absurd. hugh-smith couches the article in terms of being a pairs trade when it's not. all he did was change the currency to gold. then he looked at the resulting chart and said "look, it bounced off these lows a couple times and bounced off these highs!" as if that gives us new information. might as well just take the CL chart in USD as it comes and do the same.
Ratios are reverable
Gold in oil terms is expencive in the inverse exact amount
(oil/gold)x(allmoney)