Buying Gold for Oil Like George Soros

On his column at Forbes.com on July 17, 2008, “Gold And Oil For Soros”, Robert Lenzner says that the legendary investor George Soros, Chairman of Soros Fund Management,“finally shorted oil at $137 a barrel and put on a long position in gold; he expects to see gold hold its ground even if oil continues to decline”.

The reason for this move, according to Lenzner, is his belief in a consistent price ratio of 10-to-1 between gold and oil, and since this ratio fell lately to 7.4, “either gold will rise to 10 times a barrel of oil ($1,350 an ounce) or oil will fall to $96 a barrel--one-tenth the present market price of gold”.

Does this consistent price ratio make any sense? On one hand, there is no relationship between the fundamental values of supply and demand for gold and oil; but on the other hand, many traders buy and sell gold and oil for investment and speculation, and they would sell the commodity whose price rose too much and buy the commodity whose price did not go up at the same proportion, causing the price ratio to approach its historic average level.

click to enlarge images

Historic gold and oil prices and the ratio between them

The investor who wants to use this system to trade gold and oil basing on the price ratio between them can do it by buying and selling the suitable ETF or ETN.

Some ETFs and ETNs for Oil and Gold

Comments

[CLH:]

Following some esoteric ratio makes no sense at all. (regardless of what Soros says--although I doubt hes that dumb)

If you want to trade gold follow the dollar and inflation. Oil is over priced.

2008 Jul 24 08:12 AM

[JH24:]

This article makes complete sense...

Basically, the historic ratio is way too low and will correct itself.

By shorting Oil and going long Gold, he is going to make money in either case.

If he did go short at 137 per barrel, he is already correct.

Gold/Silver will go higher from here while Oil will maintain or trend slightly lower....

Bank on it!

2008 Jul 24 09:27 AM

[petervankan:]

There are countless passible 'historic ratios'. The question is, if a ratio is way off its historic value, must we conclude that it will move back to it ? Or may we conclude that there simply wasn't any historic ratio in the first place ?
I would say in this case: the latter. There is no ratio behind the ratio, so to speak.

2008 Jul 24 10:04 AM

[Allen Fuller:]

Following a ratio is just one reason to buy gold. Inflation and the bear market in general are several other good reasons.

Oil is a fossil fuel, both literally and figuratively. It is going the way of the dinosaurs. It will become increasingly expensive until the pain is so bad we will flee to alternatives, or our economy collapses enough to reduce demand. Its recent drop in value was just a small correction on the overall larger (multi-year) upward trend. We will probably see oil prices stagnating around this level for the next few months or even a year or two, but in the long term, if the prices haven't destroyed demand sufficiently already, they will head back up again.

We need to stop looking at the daily and weekly view and take a good hard look at the bigger picture.

2008 Jul 24 12:15 PM

[bowman711:]

I would say that $145+ oil more accurately reflects the 'new economy' demand for oil and the debasing of the dollar (inflation) than does gold under $1,000/oz. It is well documented that gold is being artificially kept low. In the last reporting period, for example, every single open interest long position was matched by a naked short position by someone (or a group of the bullion banks).

When dollars are created by fiat, each dollar is reduced in value. Likewise, when gold is 'created' by naked shorts, each real ounce of gold is devalued.

If you have an economy made up of just 1,000 oz of gold, and another 1,000 oz is 'created' by naked shorting gold (creating a contract for gold that does not exist), you now have on paper 2,000 oz of gold, but still only 1,000 oz of real gold. So, the 'price' of gold is effectively cut in half.

2008 Jul 24 12:55 PM

[StockMongerCom:]

Historic ratios aren't complete garbage, but they are not fundamentals. The fundamentals of future demand and supply determines price. The X factor is human emotions of fear and greed. The parabolic rise of oil indicates the latter. Position- short crude oil, short China, long CSC, and looking to short financials on 200 MDA test.

2008 Jul 25 04:17 PM

[optionsgirl:]

As the dollar is strengthening, gold will fall short term. As soon as the dollar starts to fall again, which it must, since there are no fundamental changes to hold it up, gold will start to climb again. I have read many predictions that gold should be upwards of $1200 by 2009, including Goldman Sachs, Kevin Kerr, etc. Until such time that the U.S. stops devaluating its currency, gold will be a safe haven. Long term, oil will rise, based on supply and production. But for now, there is no fundamental reason for it to go back up to the $147 level, in my humble opinion.

2008 Jul 29 02:20 PM

[Pearlbb03:]

This is ridiculous... oil pricing is actually backed by supply and demand... there is no legitimate demand for gold and it is simply a play against the dollar... oil on the other hand is something that the entire world needs and it is not renewable. If the notion that gold can be a substitute for currency, which it really can't be, is ever removed from the minds of traders, then gold will plummet to prices that more accurately reflect its demand, which is very minimal.

2008 Aug 01 10:04 AM

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