Even Priced in Gold, Oil Is High

Last week I showed a long term graph of the price of crude oil adjusted for inflation. But some may disagree that that graph shows a complete picture since inflation can be misstated and since the US dollar is a worthless pieces of paper. Gold is real money. Or so I’m told. So let’s take a look at crude oil priced in gold:

Well, it turns out that even priced in that “currency,” oil is expensive.

In fact, each time that the ratio of oil to gold spikes up, the price of oil (in dollars) falls. The first spike on the chart is in late 1990 and corresponds to the Persian Gulf war.

The next time was in late 2000 when crude oil peeked above $36 and then retreated. The ratio’s significance gets a bit wobbly in 2005 since oil didn’t find a top until the summer of 2006.

And finally, that brings us to today. Or rather last Friday, when oil closed up the most dollars in a day in its trading history and hit the circuit breakers. Could the explanation be that the market smells war (with Iran)? Many believe so.

The above graph looks like it might have a slightly upward channel - which would imply that if this ratio has any significance, a top in oil is close at hand.

Comments

[theinvestingspeculator]

Oil is expensive but it is getting more expensive. Oil is cheap right now. I will tell you why @
theinvestingspeculator...

[clitosil]

Or, you could look at it another way: Compared to the inflation-adjusted price of oil, the inflation-adjusted price of gold is cheap!

I just wonder why your chart starts at 1990? I'd like to see a chart starting at 1970 before I give your argument any credence.

[yosemite sam]

nope you're wrong. gold priced in oil is low

[sedek]

"Well, it turns out that even priced in that “currency,” oil is expensive."

The way I see oil priced is on three factors: in relation to gold at 10-1; plus a supply/security premium that factors in Irani embargos or Katrina type damage; plus the speculative premium, standard bubble of new money jumping on an inflated bandwagon.

In today's terms the above yields a base price of $90, plus about $25 for the recent inventory drop and Nigerian threats, as well as the little posturing dances of Bush, A'jad, and Chavez, and the rest as speculation on where oil will go next week or month, basically momentum players trying to squeeze some gravy out of the commodity bisquit:)

The recent drop in oil, 10%, came from speculative positions unwinding because of jawboning by Fed officials. Oil dropped even though inventories dropped, speculative drop overcompensating for what would normally have been about a $5.00 supply spike.

Thursday and Friday's oil spikes resulted from Trichet hinting that the Euro would strengthen from rate hikes and the unemployment jump suggesting that Gentle Ben would give more rate cuts. No concrete actions in sight, just speculation.

[paultaut]

OR, Central Banks are still feeding their still large reserves into the open market.

However, Central Banks don't have any OIL to spare.

[ArtfulDodger]

Mr. Babak:

You're right. But you're on a site with mad, raving, brainwashed oil bulls.

If you make them show you where all the demand for oil is, they'll jump to the Middle East and say the battling swords have run oil up. Then they'll blame the Fed, if you tell them there have been wars in the Middle East since 1000 AD when Pope Urban called up the first Crusade.

If you tell them the Fed had rates at 1% for five years, and oil didn't shoot up over $120 per barrel, they'll blame Bush and his "oil cronies."

You can't win. And when oil prices come crashing down, as they soon will, you'll not hear a word out of all these mad, raving, brainwashed oil bulls.

Rebeldog