The Resource Investor posted the following story with some interesting charts –
Breach! Gold Buys Less Than 7 Barrels of Oil
By Tim Wood
06 Jul 2005 at 11:03 AM EDT
NEW YORK (ResourceInvestor.com) — (UPDATED 3:30pm) On June 27 an ounce of gold bought the least amount of oil since 1970 – just 7.26 barrels. Now the 7 barrel level has been breached after the gold price weakened into the low $420 per ounce range and gold rose above $60 per barrel.Two new records have been set in succession after the Independence Day long weekend. The ratio fell to 7.11 barrels per ounce yesterday, and is presently 6.90, a nearly 5% decline since last month’s all-time record low, confounding gold bugs.
The June average set a new record of 7.65 barrels per ounce, the lowest level since September 1976 when an ounce of gold bought 7.84 barrels of oil. The long-run average (since 1970) is $17.40 barrels of oil per ounce of gold, indicating that gold is currently changing hands at a discount of nearly two fifths.
The divergence between gold and oil prices has only twice been recently comparable to recent events.
On 23 September 2003 the ratio favoured gold which was priced at nearly $384.60/oz whilst oil traded at just $26.93/bbl. Since then it has been one-way traffic with gold steadily losing ground to oil such that on 22 October 2004 it had inverted almost completely. On that day oil was priced at $55.17/bbl and gold at just $422.80 – much where it is now though oil has continued to appreciate.
To resolve the latest ratio, gold has an "expected" price of $1,072/oz whilst oil should be trading at $24.19/bbl.
A couple of thoughts on the chart.
- At first I thought this discrepancy might be a result of the lower dollar (if you priced the assets in Euros or Yen, it might show something different) but since both oil and gold are priced in $, it shouldn’t have an effect.
- The charts might be saying that oil is getting scarcer while gold is still relatively easy to find.
- The charts might indicate that energy inflation is real but that overall inflationary pressures are still tame.
- It could just mean what the chart implies – oil is expensive and/or gold is cheap. It’s an interesting long/short idea for a hedge fund.
The ratio appears to be dominated by changes in the price of oil. Perhaps the ratio needs to be adjusted for the vastly different volatilities in the two commodity prices.
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