Long Term GOLD vs OIL Ratio
Goldtent member Curly Top posted a great comment on Fully’s fundamentals thread on March 23rd. I had posited whether the US Dollar de-linking from Gold in 1971 and then linking up with Oil in 1974 in the Saudi Petrodollar deal was a sign that the US Dollar could indefinitely maintain its world reserve currency status provided that oil remains the dominant energy commodity. Curly Top’s comment below:
“yes but as someone pointed out to me decades ago, the Middle Eastern price of a barrel of oil is “set” so that roughly 15 barrels = 1 ounce of gold. This “yardstick” is used to determine when either gold or oil is out of whack. For example,at today’s oil price of approx. $65/barrel, we’d expect the price of gold to be about $1000.00. Since that’s not the case, one could argue that oil is too cheap (and why I own it.) OTOH, now that the US is the world’s major oil producer, things may have changed somewhat. In any case, If there’s validity to this theory that oil is actually priced in ounces of gold,and not dollars as it may appear, then gold is still calling the shots, albeit behind the curtains.”
When we plot a long term chart of the GOLD:OIL ratio, we indeed see a key level at 15.0 (1 ounce of Gold equal to 15 barrels of Oil, in agreement with Curly Top’s comment).
The 15.0 level also serves as a rough divider for “secular” market periods. GOLD:OIL maintained above 15.0 in the 1990s, when stock markets were in a secular bull while commodities were in secular bear. The ratio then maintains below the key 15.0 level in the 2000s, when stock markets experienced a secular bear while commodities enjoyed a secular bull.
We also see an unbroken uptrend channel (in pink on the chart) which may relate to the second part of Curly Top’s comment “OTOH, now that the US is the world’s major oil producer, things may have changed somewhat.” Maybe that uptrend channel has become the new game plan as Mr Market prices in the role of the US as the new dominant oil producer, perhaps through increased accessibility and supply which keeps the GOLD:OIL ratio elevated above 15.0. But, as we see from the behavior of the ratio from 1999 into 2000, it only takes the market a couple of months for simple mean reversion to whack the ratio back down to the 15.0 level.
Thanks Curly Top for providing an interesting train of thought to follow! -Harry
Excellent collaborative work Sir Harry
I agree this is some great discussion
maybe you have found THE indicator to watch
The Gold:Oil Ratio
Hi HHH. Thanks. I hope that you can make some money off of this!
Thanks Fully! Maybe we can call this the ‘WASP Ratio”. Wasps are black and yellow, and a close relative of the “Gold Bug” haha
Interesting that oil price crashed in 2008 but gold fell much, much less. In 2011 as gold went parabolic, oil was doing very little. Quite encouraging really – suggests a huge gold rally is very possible at these oil price and ratio levels.