Gold-Oil Ratio Weekly Status Update

We have finally gotten our break in oil. That is a major fundamental relief because with manic oil bulls stampeding, congress and the administration fretting (and plotting hair brained solutions) and the Fed stuck in a box made with walls of Greenspan's easy money policy (inflation) and the effects of that policy (escalated prices), all of us - from the average guy going paycheck to paycheck to precious metals investors - were being held in suspended animation.

The Fed is not simply pretending to be concerned about inflation in this scenario, they ARE concerned because a price explosion like that of oil - and especially the one likely in gold at a later date - threatens to discredit the institution for all to see as they pray to the money gods for the ability to ease policy while at the same time some moonshot asset class slaps them upside the head day after day.

Unfortunately, a major break in crude may also mean a confirmation of a crippled global economy and for precious metals investors, as I have mentioned endlessly, it could mean a mass exodus of the dreaded 'all the same commodity complex' bulls. See John Hussman's Total Return Fund. Once he became acutely bearish on oil, he dumped his precious metals shares. Since this is an analyst whose opinions I respect, I move forward with this in mind much as I have with Prechter's gold bearish view for years now.

Anyway, enough words. Here are the charts; a daily and a weekly of nominal oil and a daily and weekly of the gold-oil ratio [GOR]. We keep in mind that money policy is not improving and that oil is a major cost driver to precious metals miners. We are either right or we are wrong but we remain on a bullish course as long as the fundamentals in which we believe hold true - and as long as the HUI - per Friday's chart - remains intact.

Oil has broken down on the daily but the weekly shows a longer term bull market that could remain intact as long as the current monetary system remains stitched together. The GOR has bottomed and turned up with violence but I would not be surprised to see oil rebound here in nominal as well as gold terms. The charts tell the story:

click to expand charts

Comments

[The FItzman]

Of course the Fed is concerned about inflation, but that doesn't mean they can DO anything about it (or else interest rates would be up). The reality is that the US financial system has lost control of the situation (just as the architects planned it) and will thus allow the Fed (i.e. government, or "bankers") take over more and more of the financial system (again, as planned). Look at the statements from Paulsen and Bernanke lately. It's the complete reversal of what "conservative Republicanism" is supposed to be (just like all the rest of the Bush policies). The government is taking over more and more control, not less, which is what MY type of Republican conservatism is about. Of course, I am also for small government, financial responsibility, strong dollar, privacy, the US constitution...you know, all the things that conservative Republicanism USED to be about.

end result: gold will continue to rise as the US dollar continues to fall. meanwhile, the government will take over more and more control of the financial "system", and the S&P500, as it has been for the last 10 years, is dead money.

[GMiki]

Trust us, gold will not break down--and oil will return to sky high levels. Demand destruction would have to be mighty steep to actually knock down the energy complex. And inflation would have to stop its incredible rise to knock down gold. The bull isn't over until the powers that be stop dishing so much bull and issuing so much credit.

[investor88]

A good case for oil and gold. Today's article by Jim Kingsdale is also very good reading on the long term case for oil.

[CaptBob]

I guess we should all feel good we have "driven" oil beyond the grasp of the most vulnerable level of American consumers. With the result of a 'Short Term' price reduction.

Unmentioned is the fact that there are NO reserves!-in the tank nor in the ground. Supply/demand is balanced on a knifes edge and Global tensions and economic charts are driving the price more that Mr. Jones Hummer.

Oil is finite, and as the supply dwindles fewer bidders will pay higher prices. That is the way things work on the third world from the sun!.
When 90% of the population dines on Pasta Fagioli-(that's beans baby, beans) there are enough left to decimate the remaining supply of Prime Rib!.

But this has little to do with Gold. oil is merely a contributing factor--a symptom of an illness in the real patient which is our currency--'The Dollar is sick and dying'!! And everyone knows it!.

As Zimbabwe Ben try's printing our troubles away, the money supply increases and each portrait is worth proportionately less.
Commodities cost more dollars, because each dollar is worth less, oil included++less oil.
Gold is merely a substitute currency that not even Kings could change the supply/value of with an Army of alchemists!. And that is why 1. It's value goes-(and will continue)-up. and 2.People demand it to safeguard, what wealth they still possess.

That collection of Charts is worthy of hanging in the Louvre, but all they do is take the temperature of the dollar with an Oil thermometer and tell us how many Oz's of Gold Rx to give the patient!.

[bowman711]

How can gold be compared to anything when it is being so blatantly manipulated through NAKED short selling by the bullion banks? Look at today's picture: www.kitco.com/charts/l... Has anybody else heard any news that would cause gold to drop $30+ in a couple of hours - starting as soon as New York trading opened?

[Emerald]

Thank you "Fitzman" for calling it exactly as it is! Independents, libertarians, and moderate Republicans wake up. Ther is such a thing as good government that can provide some regulatory oversight and keep the wheels on the bus. We need new leadership and poor ole John McCain is just not it. Obama, who knows. The lobbyists are in charge, the dollar must stay debased to keep the banks from failing and food and energy can only creep higher. The poor stay poor and the middle class gets crushed. They bought the kool-aid sold by the neocon snake oil slaesmen and now don't want to be sick. Sorry, its a multi year illness before we get better. Suggest GLD, commodities (DBC, DBA), energy MLP's, foreign government bonds, drillers and cash divided among amt tax free muni money market funds, the Aussie (FXA) and the Euro (FXE). Have some risky cash? Short the consumer, tech and the dow (CSS, REW, DOG) Disclosure: I hold all recommended positions.

[petervankan]

Agreeing with Emerald: the impression I have is that Obama at least UNDERSTANDS the situation.

[User 30121]

Petervankan: WHAT does Obama UNDERSTAND? Please tell us SPECIFICS backed up by FACTS. Obama KNOWS how to play to the LEFTWING LOONIES for $$$. He knows little else, period. McCain ISN'T the answer, either, but McCain would NEVER sell out his country...which is EXACTLY what Obama WILL do! And, frankly, there are those of you so-called Americans that may well DESERVE him to win, so you can see first hand how BAD this can USA can really get!

Excuse the rant, but I'm just frustrated that we have such an absence of strong thinkers and honest politicans in Washington these days. Its a discrace!

[Jake2]

John (yawn) McCain: "I know how to win wars."

[CLH]

Oil and gold are both dropping as the commodity bull craps out.

Buy financials and airlines. Always buy whats cheap not whats expensive.