July 2, 2008 - Courtesy of BMG Inc. - The Gold:Oil Ratio gives us a curious chart. What is to be made of this comparison between two commodities? Some will argue that gold is a currency, and that this chart shows an inverse price for oil in real money, gold. With oil at all–time highs and gold just off of its own high price, the two are showing the effects of inflation as they increase in price with every new US dollar printed. The relationship between the two are seen in this chart, and interesting points are noted.
Hurricane Katrina gave us an oil price spike in August 2005, which shows up as a sharp bottom in the chart. Gold’s run to over $1000 earlier this year shows up as a top, followed by a sharp decline in the ratio as oil prices ran up to $140 per barrel while gold retreated to the $900 area. This seesaw movement of this ratio’s chart may only be indicating the ebb and flow of these two markets. But we can take something from the long-term average of this ratio of 15: If oil is the “right price” and the average of 15 is applied, the price of gold would be headed towards $2025. If gold is at the right price, then oil would be headed to $60. Believe either of those calculations at your own peril. The ratio spends time above the long-term average of 15 typically during a bull market in equities. The average for this decade is around 10.
With this value, the ratio suggests gold would be $1350 or oil $90; perhaps these are more reasonable short-term targets as suggested by this ratio.