Is Gold’s Quotient Rising?

By Brad Zigler

With all the hoopla centered on the oil markets of late, gold bulls are feeling a little pushed out of shape. Or at least pushed out of the limelight. Gold's near-term weakness, of course, hasn't helped. The metal fared well in the overnight market Thursday, but that was consolidation after the floor session sell-off, which was, itself, a continuation of the two-month slide in bullion prices. June COMEX futures are now $149, or 15%, below the St. Patrick's Day peak of $1,021 per ounce.

Not to worry, though. There'll soon be plenty of green to be made from gold, according to some stalwarts. A lot of this half-glass-full jawboning seems to be centered on the gold/oil ratio, a quotient expressing gold in terms of the quantity of oil it can purchase.

The call for a rally in the yellow metal presently ensues because the gold/oil ratio has sunk well below its historic 10- or 12-to-1 range. At 7-to-1 now, one pundit claims "the [ratio] is now down in the area near the ridiculous 2005 bottom."

Ridiculous? Well, I guess in hindsight it seems so. We all know what happened to gold prices after 2005.

So is that reason enough to buy gold now? The ratio's recent vacillation at the 7x multiple is still short-lived. Perhaps it is basing, but there's a bit of work to be done to get the ratio over its 50-day moving average which now sits as resistance at the 7.8 level. Secondary resistance is the 200-day moving average at 8.8.

Gold/Oil Ratio

Other ratios are due to put in bottoms, too, according to technicians. The traditional gold/silver quotient, pretty much locked at 52-to-1 since the St. Patrick's Day break, is also due for a pop, they say. This week's 2% decline in gold, when pitted against the 3% slippage in silver's price, nudged the ratio nearly a half-point higher. A harbinger of future moves? We'll see.

The gold/oil and gold/silver ratios may point to latent strength gathering in the bullion market, but another quotient seems to say the metal is already doing fine - thankyewverymuch - against mining stocks. A price ratio gauging the SPDR Gold Trust (NYSE Arca: GLD) versus the Market Vectors Gold Miners ETF (AMEX: GDX) shows bullion still holding on to an advantage that's stair-stepped higher over the past six months. Unless you're spreading the two ETFs against one another, though, there's cold comfort in the escalating ratio given the recent downward trajectory of both assets.

GLD/GDX Ratio

No, it seems a little early yet for the turnaround in gold bullion's fortunes. Those half-full glasses may have to be drained before the bulls stand for the next round.

 

Comments

[sorgmot:]

Gold and gold stocks are doing what they usually do at this stage in the business cycle. Gold goes up in US $ as the USA recession progresses. Based on past data we look for the USA recession to drag on through 2008 and 2009. That means upward price movement in gold/$ to the end of 2009.

Stocks of gold mining companies like to go up from Oct of one year to April of the next on and then drift down to the next October. Stock price increases tend to rise in larger percentages than do the gold metal prices.

2008 Jun 08 04:33 PM

[Jake2:]

Finally some disinterested (and dispassionate) common sense about gold. Just follow the bouncing ball. Simple as that, one hopes.

2008 Jun 09 12:59 AM

[maher:]

Destination $3000 Gold.
Iran will help us get there. :)

2008 Jun 12 06:06 PM