SwingTimer

Predicting Oil Prices Through Gold

The only thing that gold and oil seem to have in common is that both are priced in US$ - hardly a basis for assuming a meaningful relationship between them.

The value of gold is determined largely by its perceived "safe-haven" end-of-the-world characteristic as a defensive "store-of-value" - something which is very real and useful in the minds of most gold investors, I suppose.

Oil, by contrast, is one of several crucial input components to modern economic activity - what you could call a "facilitator" / "creator-of-value" with respect to such vital functions as manufacturing (plastics, etc), transportation, etc.

Thus, one has been and likely will remain a largely static and emotional prop, while the other has been and will remain for the foreseable future an essential that "greases" the wheels of modern prosperity (notwithstanding the advent of alternative energy sources).

Let's remember that correlation is not equivalent to causation. Thus, the use of "correlated" assets in making investment decisions should not be given undue weight. And this is especially relevant when you consider, as pointed out by Richard, that the ratio of gold to oil has "shifted" dramatically between the 1990s timeframe and the more recent 8-9 years.

Ratio of Gold to Silver

This ratio analysis between gold and silver is all well and good, and perhaps even useful. But unless you can predict one component (either one) with some degree of certainly -and by some relevant fundamental/technical evaluation proceedure which takes into account prospective conditions - the ratio's status is quite meaningless. Just my humble opinion.

The same can be said about standard deviations as a useful measure of propensity for reversion to the mean. But, again, such a measure (while a quite useful evaluative tool) does not CAUSE nor necessarily MANDATE a particular change in the value of the underlying under analysis. It merely DESCRIBES what HAS happened - not what WILL happen.

So, to the extent that historical circumstances can be useful in describing the "nature" of a particular "item", any measure of historical circumstances is most relevant, and useful - but should be considered insufficient as the basis on which to make an investment decision....in my humble opinion.

In the current environment of demand destruction for commodities generally ( and silver in particular), the single most relevant factor is the fact of supply destruction arising from the well-known price erosion and curtailment in the availability of financing.

By contrast to silver, which has a basis for its price given its demand for industrial purposes, gold's utilitarian value is minimal and is largely ornamental. In my opinion, the largest prospective merit in buying gold is the assessment that SOMEONE ELSE makes regarding whether gold may or may not be worth more than its current price - not an sound basis for valuing an asset!

....in my humble opinion, so draw your own conclusions.