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There’s a relationship between gold and oil that’s worth understanding because each, 
being valued in U.S. dollars, putatively serves as a measure of inflation and, since both commodities have a common denominator, it’s easy to price one against the other. Ergo, the gold/oil ratio i.e. the price of gold expressed in barrels of crude, and the current gold/oil ratio begs the question: “Is gold getting pricey or is oil too cheap?
- In the summer of 2008, for example, oil headed to record heights tamping down the multiple to 6x.
- Just nine months later, the ratio rocketed above 27-to-1 and, then, a fall back to the historic average.
- A look at the current gold/oil ratio in the chart below…shows our first foray above the 15-to-1 average in over a year.
That roller coaster ride provided savvy-and nervy-traders several profit opportunities. There is, for example, a spread recognized between Comex gold and cash-settled Nymex oil futures contracts. In one trade, one could have bought gold and sold oil to ride the ratio skyward, then flipped the trade over to surf the ensuing plunge. Less adventurous bettors could have used exchange-traded funds and notes in their securities accounts.
Why bring this up now? Hindsight is always 20/20 and forecasts…tend to be murky, but a look at the current gold/oil ratio in Chart 1 above…shows our first foray above the 15-to-1 average in over a year.
That leads us to two questions:
- Is gold getting pricey or
- is oil too cheap?
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I love the sophomoric stance that gold is too pricey, as if it is secondary. Nope, it is the one money that the U.S. dollar is measured in – and the dollar is going lose. Frankly, it has already lost – big time! No, you say? Just look at the 100 year chart!