Gold 1, Oil Analysts 0

By Brad Zigler

Oil analysts' target shooting doesn't seem to be getting any better. Yesterday's consensus predictions for oil and distillate inventories both overshot and undershot their marks (see "Oil Market: Wholesale Vs. Retail").

Crude stocks, according to this morning's Energy Information Administration report, remained unchanged, at 311.9 million barrels. Analysts were expecting a 750,000-barrel build. Gasoline supplies, forecast to increase 200,000 barrels, grew instead by 2 million. Distillate fuel inventories, including heating and gasoline, rose by only 600,000 barrels, well short of the prognosticated 1-million-barrel hike.

Three strikes. But we're used to that (see "Oil Analysts Down For The Count").

U.S. Crude Oil Inventories

What might have taken us by surprise, however, was a radical move in the gold/oil ratio. That's the gauge that measures gold's purchasing power in barrels of oil. We last looked at the ratio ("Gold Approaches Record; Makes New High") in October, just as the financial market meltdown began in earnest.

Oil took a drubbing Wednesday, leaving the nearby NYMEX contract below $60 a barrel at the close, a level not seen since March 2007. The sell-off sent the gold/oil ratio to 13-to-1, above the 12.5-to-1 peak reached in January 2007, when crude was trading at $50.

Gold/Oil Ratio

Does this mean that traders might target $50 for crude now?

Maybe, maybe not.

The current ratio, lofty as it is, is not a lifetime high. The gold/oil ratio spent a good deal of its time above 20-to-1 in the late ‘80s and early ‘90s, even dancing briefly around the 30-to-1 level. Of course, oil was pretty cheap back then.

Wait a minute ... cheap oil?

Comments

[Steven Hansen:]

maybe it is time for gold to leave its relationship with oil. this marriage should annulled as they have little in common except a coincidental relationship that has little love.

2008 Nov 13 08:10 PM

[petervankan:]

What about the oil - Belgium chocolate ratio ?

2008 Nov 14 09:45 AM

[Managing Ed...:]

The relationship, I'm afraid, cannot be annuled. Goild and oil are wed for life. Bottoming in the gold/oil ratio, in fact, is a herald of impending economic slowdowns.

The last five US recessions followed 20 to 30 percent declines in the gold/oil ratio from then-recent highs. The current market got followers of the ratio particularly nervous. The ratio nearly 50% from its February 2007 high to a trough at 6.4-to-1. If nosedives in the ratio are indeed predictive, the recession forecast then would figure to be a real whopper.

And why would a dip in the ratio predict bad times to come? Put simply, rising oil prices – relative to a monetary constant like gold -- slows industrial and consumer demand, choking off economic growth.




On Nov 13 08:10 PM The hand wrote:

> maybe it is time for gold to leave its relationship with oil. this
> marriage should annulled as they have little in common except a coincidental
> relationship that has little love.
>
>

2008 Nov 16 12:49 PM

[otbricki:]

Gold has nowhere to go but down from here. We are in a deflationary spiral for the next year because of massive deleveraging destroying money faster than the Fed can force-feed it into the economy.

Longer term though the pendulum will swing the other way and gold become a good investment as oil skyrockets and the dollar tanks.

2008 Nov 16 08:02 PM

[Managing Ed...:]

You can now monitor the deflation/inflation cylcle in real time. The monetary inflation rate will be updated daily as a headline in each Brad's Desktop article on Hard Assets Investor (www.hardassetsinvestor...).

On Nov 16 08:02 PM otbricki wrote:

> Gold has nowhere to go but down from here. We are in a deflationary
> spiral for the next year because of massive deleveraging destroying
> money faster than the Fed can force-feed it into the economy.
>
> Longer term though the pendulum will swing the other way and gold
> become a good investment as oil skyrockets and the dollar tanks.
>
>

2008 Nov 17 01:40 PM