Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Peloton 35% CRASH a Lesson of What Happens When One Over Pays for a Loss Making Growth Stock - 1st Dec 21
Stock Market Sentiment Speaks: I Fear For Retirees For The Next 20 Years - 1st Dec 21 t
Will the Anointed Finanical Experts Get It Wrong Again? - 1st Dec 21
Main Differences Between the UK and Canadian Gaming Markets - 1st Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - 30th Nov 21
Omicron Covid Wave 4 Impact on Financial Markets - 30th Nov 21
Can You Hear It? That’s the Crowd Booing Gold’s Downturn - 30th Nov 21
Economic and Market Impacts of Omicron Strain Covid 4th Wave - 30th Nov 21
Stock Market Historical Trends Suggest A Strengthening Bullish Trend In December - 30th Nov 21
Crypto Market Analysis: What Trading Will Look Like in 2022 for Novice and Veteran Traders? - 30th Nov 21
Best Stocks for Investing to Profit form the Metaverse and Get Rich - 29th Nov 21
Should You Invest In Real Estate In 2021? - 29th Nov 21
Silver Long-term Trend Analysis - 28th Nov 21
Silver Mining Stocks Fundamentals - 28th Nov 21
Crude Oil Didn’t Like Thanksgiving Turkey This Year - 28th Nov 21
Sheffield First Snow Winter 2021 - Snowballs and Snowmen Fun - 28th Nov 21
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21
Stock Maket Trading Lesson - How to REALLY Trade Markets - 26th Nov 21
SILVER Price Trend Analysis - 26th Nov 21
Federal Reserve Asks Americans to Eat Soy “Meat” for Thanksgiving - 26th Nov 21
Is the S&P 500 Topping or Just Consolidating? - 26th Nov 21
Is a Bigger Drop in Gold Price Just Around the Corner? - 26th Nov 21
Financial Stocks ETF Sector XLF Pullback Sets Up A New $43.60 Upside Target - 26th Nov 21
A Couple of Things to Think About Before Buying Shares - 25th Nov 21
UK Best Fixed Rate Tariff Deal is to NOT FIX Gas and Electric Energy Tariffs During Winter 2021-22 - 25th Nov 21
Stock Market Begins it's Year End Seasonal Santa Rally - 24th Nov 21
How Silver Can Conquer $50+ in 2022 - 24th Nov 21
Stock Market Betting on Hawkish Fed - 24th Nov 21
Stock Market Elliott Wave Trend Forecast - 24th Nov 21
Your once-a-year All-Access Financial Markets Analysis Pass - 24th Nov 21
Did Zillow’s $300 million flop prove me wrong? - 24th Nov 21
Now Malaysian Drivers Renew Their Kurnia Car Insurance Online With Fincrew.my - 24th Nov 21
Gold / Silver Ratio - 23rd Nov 21
Stock Market Sentiment Speaks: Can We Get To 5500SPX In 2022? But 4440SPX Comes First - 23rd Nov 21
A Month-to-month breakdown of how Much Money Individuals are Spending on Stocks - 23rd Nov 21
S&P 500: Rallying Tech Stocks vs. Plummeting Oil Stocks - 23rd Nov 21
Like the Latest Bond Flick, the US Dollar Has No Time to Die - 23rd Nov 21
Why BITCOIN NEW ALL TIME HIGH Changes EVERYTHING! - 22nd Nov 21
Cannabis ETF MJ Basing & Volatility Patterns - 22nd Nov 21
The Most Important Lesson Learned from this COVID Pandemic - 22nd Nov 21
Dow Stock Market Trend Analysis - 22nd Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Analysis of the Relationship Between Gold and Crude Oil Price Trend

Commodities / Gold & Silver Dec 19, 2008 - 12:23 PM GMT

By: John_Lee

Commodities

Best Financial Markets Analysis ArticleAs I toured around the world to talk about the merits of gold during the last several years, the same question was posed to me over and over again

"John, oil is $80, $100, $150 a barrel, why hasn't gold lived up to its reputation as a hedge against inflation?"


Oil's triumph over gold from 2001 - mid 2008

While gold investors faired well as gold went from $250/oz in 2001 to $1,000/oz in early 2008, oil investors reaped stupendous profits as oil price topped $145/barrel in July 2008, up from $22/barrel in 2002.

Ten year charts of gold and oil


People have attributed oil's superior rise, and the relative underperformance of gold to

1. Peak oil theory
2. Emerging market needing oil, not gold
3. Oil is consumed and gone, while there are lots of gold
4. Jewelry market favoring platinum, not gold anymore
5. Central banks having lots of gold to sell

And my answers have always been

• Oil production has been rising yearly from 60million barrels a day in 1980 to now over 80 million barrels a day
• Gold is about preservation of global wealth, which is ever increasing.
• Gold is money, which is to be saved, not consumed
• Jewelry demand represents a tiny fraction of gold's trading or gold's total volume, most of it in bullion form.
• True, but central banks today have also inordinately large amount of US dollars (over $8 trillion), yet to be diversified.

So why was gold lagging until recently? My single most plausible answer was

"People are buying the growth story. Speculators like oil, not gold at the moment."

Financial deleveraging and gold's resurgence in 2008

The fortunes of gold and oil have reversed 180 since July, when we witnessed the most speculator fall in oil's history in the last 100 years. Oil price plunged over $110, or 75% from $147 to $37 a barrel. You can't possibly explain away such dramatic correction by fundamentals. So what if super tankers are storing oil and world oil inventory now can sustain 59 days instead of 54 days of global consumption. Would you see the price of milk go down 75% because people are cutting back consumption?

In my view, the freefall of oil price has more to do with the collapse of Lehman Brothers, US banking, and US hedge fund industries. Many of those outfits are leveraged up to 30 times, bankrupt, and had to close out entire line of positions (including oil) in a hurry at any cost.

We can also see the rapid and all-out deleveraging through the reversal of yen carry trade. The yen has gone up 24% since August not because Japan all of a sudden became a star investment destination.

12month yen chart

Where is gold headed?

Adjusted for inflation/CPI/money supply growth, various analysts have pegged a fair gold price of between $700/oz and $1,200/oz. Gold authority James Turk will show you how gold has exchanged more or less the same units of oil through hundreds of years.

20 year chart of gold to oil ratio

The lower and upper horizontal bands in the chart above show an oz of gold has exchanged between 22 and 10 barrels of oil since 1989. The ratio dipped to as low as 7 and right now it trades at 20. One shouldn't buck against the trend and I expect the ratio to exceed 20 to reach perhaps 30 or more.

You can play with two of the three variables (oil, gold, and ratio) and come up with the third. For example, at ratio of 30 and oil price of $50/barrel, the formula produces a gold price of $1,500/oz. I honestly have no idea what future lies, except

• Oil is oversold and cheap
• Gold is not expensive by historic means
• The gold-to-oil ratio will keep rising until it comes down.

Fundamentally gold is attractive as investment of last resort. It's no good to leave money at the banks earning zero interest, or buy real estate that is faltering, or invest in equity market during recession.

While gold's blow-off phase is yet to come, I like to offer a word of caution. Given how quickly things can change, it might soon be a good idea to hedge gold position by longing oil.

Enjoy the ride and happy holidays from all of us at Mau Capital.

John Lee, CFA
johnlee@maucapital.com

http://www.goldmau.com

John Lee is a portfolio manager at Mau Capital Management. He is a CFA charter holder and has degrees in Economics and Engineering from Rice University. He previously studied under Mr. James Turk, a renowned authority on the gold market, and is specialized in investing in junior gold and resource companies. Mr. Lee's articles are frequently cited at major resource websites and a esteemed speaker at several major resource conferences.

John Lee Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Jhalak Khatiwada
08 Dec 09, 12:32
Gold and Crude Oil realation formula

I want to Know relation between gold and crude oil as short . This is good but i need short pls


Post Comment

Only logged in users are allowed to post comments. Register/ Log in