I'm new to the board, my apologies if this is stale info. Have been reading an interesting article today on the Gold/Oil ratio (GOR). It defines a 60 year relationship between the price of the two commodities that has been statistically consistent with the ratio at 15.2 barrels of oil to an ounce of gold. The article suggests that in the current disparity a reversion to the mean requires a plunge in oil, a surge in gold or a combination of the two. The article states that the current disparity is the LARGEST on the low (gold) side in 60 years, approaching 2 standard deviations. The statistics say the ratio should be within 2sd 95.4% of the time. It also notes that on the previous 6 largest deviations to the down (gold) side that the reversion brought gold to +3sd once, +2sd once, +1sd once and par three times. The +3sd was momentary in Jan 1980 when gold reached a price of $2140 in 2005 dollars. The reason for the link is perhaps intuitive - both commodities are real, precious and serve as a hedge against wholesale printing of paper money. The link could dissolve, but is that likely? Oil could collapse, but how likely is that? The secular bull in oil is in it's infancy in all likelihood. If the price of oil is supported at it's 200dma at >$50, a par reversion to the mean of gold would bring the price to $760. Blue skying, if oil finds a range of $50 to $80 and gold reverts and overshoots by 2sd the price hits $1500. Just spitballing here, will dig in for more clarification, but it got me off my 15 year resistance to be a gold bug. As the article points out, 1st World investors hold minimal positions in gold and with it's scarcity an inclination for those investors to hold a tiny bit of gold would give the price quite a liftoff. Comments welcome, especially constructive ones.
>I'm new to the board, my apologies if this is >stale info.
Welcome to the board. Have you been in GG (or WHT prior) very long? This has been a topic of interesting discussion here.
>Have been reading an interesting article >today on the Gold/Oil ratio (GOR). It defines >a 60 year relationship between the price of >the two commodities that has been >statistically consistent with the ratio at >15.2 barrels of oil to an ounce of gold.
The ratio has different supply and demand forces working on each side of the ratio. There are also two routes of logic one can apply here to determine the validity of the ratio. The first question that must be considered is will this ratio always revert back to the mean or can something significantly change it. The second question is if the ratio does revert back gradually, which will break more: oil down or gold up? If you conclude the answer to the first question is that it will revert to the mean, the answer to the second question should help you decide if short oil or long gold is the ratio play.
The oil side contends that
1) unlike gold, oil is a commodity that once burned, cannot be restored. Since the supply of oil is continuously being reduced, every new barrel of oil is just a little bit more valuable than the previous one. Gold, on the other hand, is not consumed. The counterargument is we do not know how much oil is in the ground and whether or not the earth is actually continuously creating it (i.e. not really a fossil fuel?)
2) a person can live his or her entire life peacefully and well without touching a piece of gold, but try living a modern life without ever using a barrel of oil or a product made from a barrel of oil (e.g. plastic). Counterargument: the need for oil will be drastically reduced if new energy technologies replace petrol combustion. Also, some cultures really do consider gold as a vital part of life.
The gold side contends that
1) Oil wells can be found everywhere, but gold mines are very rare. Counterargument: irrelevant. The ratio already discounts supply and demand.
2) Gold is true and stable money. This is the second most hotly contested debate here, after "is **** actually an alias of ****?" Counterargument: when was the last time you bought something in gold?
3) The petrodollar hegemony will soon be eclipsed by gold. Gold will be needed to buy oil. Counterargument: speculation that America will sit back and watch that happen. Can you say Iraq?
4) The fiat dollar is collapsing and gold is our only protection. Counterargument: will the manipulators let this happen without extreme measures?
I am sure my friends on both sides of this debate can weigh in on the specifics. Personally, I trade the charts, not the ratios. I'm not convinced of the validity of commodity ratios (e.g. silver:gold). It is an interesting discussion, however.