Below is an extract from a commentary originally
posted at www.speculative-investor.com
on 27th April 2006.
There isn't a consistent relationship
between gold and oil. In fact, the number of barrels of oil it
takes to buy one ounce of gold tends to make huge swings -- from
below 10 to above 25 and then back again -- and doesn't spend
much time at all near its long-term average of 15. These huge
swings are illustrated on the following sharelynx.com (http://www.sharelynx.com)
chart of the gold/oil ratio.
With respect to the current situation, the only
reasonable conclusions we can draw from the historical performance
of the gold/oil ratio are:
a) At the end of last August, in the immediate aftermath
of Hurricane Katrina, gold was as cheap relative to oil as it
has been at any time over the past 35 years, and although it has
out-performed since that time it is still very cheap relative
b) Over the past 35 years there have, prior to last
year, been 4 times (1976, 1982, 1990 and 2000) when the gold/oil
ratio dropped into single digits. In each case the ratio rebounded
to above 15 within the ensuing 2 years.
Now, just because markets performed in a certain
way in the past doesn't mean they will perform that way in the
future. It could be argued, for example, that there's been such
a big change in oil's supply/demand situation that the gold/oil
ratio will continue to move lower over the coming years.
Our view is that the gold/oil ratio made a
major bottom last year and will, as a minimum, move up to 15-20
within the next two years. There are two main reasons for this.
First and as explained in previous commentaries,
there is a lot of evidence that inflation expectations remain
quite low despite the many obvious signs of an inflation problem.
This suggests that few people appreciate the bullish case for
gold -- gold has, we think, been pushed higher as part of a general
commodity play rather than as a monetary play -- and, therefore,
that the market hasn't yet begun to really discount gold's bullish
fundamentals. On the other hand, is there anyone in the world
who isn't well versed on the bullish case for oil?
Second, a sharply higher gold price would
have no direct effect on commerce whereas a sharply higher oil
price would hinder economic growth (and thus sow the seeds for
a reduction in oil demand). A rising gold price might be perceived
as evidence of an emerging inflation problem and might therefore
create upward pressure on interest rates, but then again it might
be possible for the media and the monetary authorities to explain
away a substantial rise in the gold price as a reaction to geopolitical
tensions, or China's growth, or gold buying by Arab sheiks, or
falling mine supply, or something else unrelated to the true cause
(inflation). The bottom line is that the gold price could rise
to a multiple of its current level without making a significant
difference to the economy (except to the extent that it affected
inflation expectations), but the oil price could not do the same.
Regular financial market forecasts
and analyses are provided at our web site:
One-month free trial available.