Implications of a Rising Gold to Crude Oil Ratio

The Gold to Crude Oil ratio is a well-known relationship with key implications for investors. Historically hovering around 15, the ratio recently hit an extreme of 24 not seen in a decade.

Looking at the chart below, we can see that the Gold to Crude Oil ratio can be used as a good proxy for investor sentiment. Notice how the ratio started trending strongly upward when Lehman collapsed along with stocks. It is during times of fear that gold becomes less of a commodity and more of a monetary metal.

While oil has been getting hammered lately, gold has held strong and has been able to maintain the 30 day moving average. The upcoming weeks are critical for the bullish case for gold. We shall know soon if gold is ready to assault $1000 once again.

While it's still a little early to confirm that this is a sustainable trend change in the Gold to Crude Oil ratio, investors should take note of variations in this ratio. Recent declines in stocks and negative economic data suggest fear may be reentering the system; and we all know that in times of fear, gold shines.

Comments

[john s. gordon]

on the other hand, speculation is rampant in the form of oil-filled tankers floating @ sea hoping to at some point in the future to unload their cargo @ a profit.
not many cargo ships at sea filled with gold bricks hoping to unload at a profit before sinking.
> jack

2009 Jul 08 08:27 AM

[Moses Kim]

You're right, gold bricks are being stored in vaults. I think everyone will get a good lesson in dynamic processes when gold starts moving.

2009 Jul 08 11:31 AM

[Mono]

freya

elevator conversation. i don't care too much for the ratio, but i have ideas on gold moving up. where do you think it is going down to

On Jul 08 12:24 PM Freya wrote:

> Gold is moving and realigning to the Ratio you posited. With WTI
> around $61 and Gold around $910, the ratio is around 15.
>
> You are right on the Ratio. Totally wrong on Gold.
>
> Good thing you published this today. Not too many people have been
> hurt.

2009 Jul 08 12:36 PM

[Moses Kim]

Freya,

"Gold is moving and realigning to the Ratio you posited. With WTI around $61 and Gold around $910, the ratio is around 15."

That's not saying much, it was 15 yesterday too. If you read my post again, you will see that I say to keep an eye on the 30 day, not to go all-in on gold. If you're working from a longer term framework, days like today mean nothing.

2009 Jul 08 12:46 PM

[Moses Kim]

Freya,

I also see 850 or perhaps even lower as a possibility. I will continue to add to my positions accordingly for the real move in gold. The fundaments are still very strong for gold.

2009 Jul 08 01:40 PM

[Larry House]

Thanks for the useful post. I am not sure I trust any market action right now--stocks or precious metals or oil. I would like to think there is a level, fair playing field for all, but I am not so sure.

2009 Jul 08 01:41 PM

[one eye]

The thing is that there has never been a "fair, level playing field for all".

What is different, is that people have finally figured out that "manipulation" has existed in the past, continues in the present and will continue into the future.

That's why charting is so important in my investments, that and Buy and Hold which eliminates the day to day manipulation.

There isn't any stock which can't be swayed by Buy/Sells in the Millions of shares which the Institutions are capable of tossing into the System at any point in the day, any day.

2009 Jul 08 01:56 PM

[Mono]

freya and moses agreed. hopefully enough will generate with dollar talk and imf sales that i can get in on the cheap

2009 Jul 08 04:36 PM