By Tim Wood -
NEW YORK (ResourceInvestor.com) -- The ratio of oil-to-gold prices spiked to a 29-year peak in March reflecting the persistent divergence in the fortunes of the two resources. The ratio has been steadily ascending since September 2003 with only a brief interruption last November, and reached an all-time daily high of 0.135 on 4 April when oil prices topped $57 a barrel whilst the gold price fell below $424 per ounce.
In real terms oil is the most expensive it has been since January 1983 at $50/bbl. Gold continues bump up against the a constant 2000 dollar ceiling of $400/oz which it achieved last August, which was the best showing since the same month in 1996. Indeed, gold has been entirely subordinated in the relationship to oil through its latest bull cycle.
Market watchers have been looking for a reversion to the mean that would have to favour gold given how extreme the ratio has become. However the long-term record reflects very few periods near the mean – the markets spend lots of time in ‘outlier territory’.
At the average ratio from January 1970 to March 2005, and based on Tuesday’s closing prices for oil and gold, the latter has an “expected” price of $800/oz, and the former $27.21/bbl. In other words, gold is apparently $372/oz too cheap and oil is $24/bbl too expensive.
With oil prices unlikely to fall below $30/bbl for any sustained period, gold bugs are reasonably betting on the ratio being corrected through a higher gold price. If not; it’s truly history in the making.
If the Goldman Sachs oil price spike of $105/bbl is realized by the end of this decade, but gold did not move, the ratio would more than double from its current level which seems highly improbable. In the $105/bbl scenario, gold would have to be trading higher than $1,300/oz to revert to the projected mean.
Does that guarantee it will happen? Certainly not, but it’s worth watching the action because the ratio has defied expectations for almost a year.
Source: Resource Investor
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