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The value of gold relative to oil (Brent Crude) is an embarrassing 11.2 to 1 ratio – way below its historical average – thanks to the manipulation by the Fed and member banks. When the price revalues higher it will do so SHARPLY and it will be PAINFUL for those on the wrong side of the trade or in worthless paper assets. Let me explain why that is the case.
If we look at the table below, we can see the average Gold-Oil Ratios for the past 5+ decades. When the U.S. Dollar was backed by gold, the average gold-oil ratio during the 1961-1970 period was 20 to 1. Which means one ounce of gold could purchase 20 barrels of oil:
Even though gold reached $850 in 1980, we can see that the gold-oil ratio for the 1970′s decade fell to 16 to 1. The reason for the decline in the gold-oil ratio during the 1971-1980 period was due to the price of oil skyrocketing in response to the U.S. oil embargo as well as a peak in domestic oil production (1971)...
After Fed Chairman Volcker increased interest rates to double-digits, saving the the U.S. dollar (1980), the price of gold declined from an average of $612 in 1980 to $350-$400 range in the 1981-1990 time period – and oil continued to decline from $36 in 1980 to a low of $14 in 1986. Thus, the low price of oil pushed the gold-oil ratio to an average of 19 to 1 during the 1981-2000 period.
If we go by the price of Brent Crude which is currently trading at $113.35, we have the following values for gold:
1961-1970 (ratio 20/1) = $2,267
1971-1980 (ratio 16/1) = $1,814
1980-2000 (ratio 19/1) = $2,154
2000-2014 (ratio 12/1) = $1,360
Currently, the gold-oil ratio is 11.2 to 1, with the price of gold at $1,275. This next chart shows clearly how the price of gold was manipulated lower in 2013 and 2014… pushing its gold-oil ratio well below the averages during the past four decades.
We can see from this chart that the price of gold is rising in tandem with the price of oil.
- the average Gold-Oil ratio was at 18 to 1 for the 1961-2000 period.
- In 2012, the average price of gold was $1,669 and oil $112 a barrel, at a gold-oil ratio of 15 to 1…[or] 3 barrels short of its previous 4 decade average.
- Today the price of gold is $1,275 and the gold-oil ratio is 11/1 which means an ounce of gold today buys seven less barrels of oil than it did from 1961-2000 average (18/1 ratio)…
If we take the average gold-oil ratio for the previous four decades of 18/1 and multiply it by the current price of Brent Crude at $113.35, we end up with a base price for gold of $2,040…. or $765 higher than the current spot price.
Conclusion
$2,000 an ounce just brings the value of gold back in line with its ratio to oil. It DOES NOT INCLUDE the huge increase in monetary printing, debt and derivatives which have funneled a great deal of value away from the King Monetary Metal. Once we include these factors, that base price of $2,000 should be higher by several orders of magnitude!…
The Fed and top banking institutions rigging the precious metals market to a low Gold-Oil ratio of 11/1 means that when the price revalues higher it will do so SHARPLY and it will be PAINFUL for those on the wrong side of the trade or in worthless paper assets.
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Addendum:
I’ve received emails from readers who believe the Gold-Oil ratio is falling because technology is becoming more efficient. BOLLOCKS. While this sounds nice at face value, the opposite is the case.
- In 1970, the EROI – Energy Returned On Invested in the United States oil & gas industry was 30/1 which means, it took the energy of one barrel of oil to produce 30 barrels for the market.
- Today, that EROI ratio is down to 10/1.
- Moreover, the U.S domestic shale oil industry with a 5/1 EROI makes the situation even worse — if not dire. It doesn’t even pay the energy bills!
Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.
*http://srsroccoreport.com/why-golds-base-price-should-be-north-of-2000/why-golds-base-price-should-be-north-of-2000/ (© 2014 SRSrocco Report. All rights reserved)
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I’d also add that “cheap Oil” is a thing of the past since it now cost far more to drill for new Oil reserves, so that in effect will cause the price of Oil to go upward which will also have a direct effect upon the value of the Gold to Oil ratio described above.