Tuesday, January 6, 2015

Gold-oil ratio's meaning for crude

The highest gold prices relative to oil since the 1990s show crude’s plunge stems from excess supply rather than potential deflation, according to Michael Shaoul, chief executive officer of Marketfield Asset Management LLC.

The chart shows the ratio between the two commodities since 1971, when the precious metal’s price was allowed to fluctuate rather than being fixed in dollars. Spot gold, available for immediate delivery, and historical crude prices compiled by Bloomberg were used in the comparison.

One ounce of gold -- a metal that many investors view as a hedge against inflation -- cost as much as 23.9 barrels of West Texas Intermediate crude yesterday at spot prices, according to data compiled by Bloomberg. This ratio has almost doubled since May and hasn’t been higher at the end of a month since October 1998, when Russia, an oil producer, defaulted on debt.

“Critically, the supply of crude oil advanced in response to an investment boom,” fueled by development of fracking and other drilling technology, Shaoul wrote yesterday in a report featuring a similar chart. The increase “now seems to have overwhelmed demand without the latter deteriorating.”

History shows the ratio may be “driven to an extreme should crude oil’s own price experience a further collapse,” the New York-based money manager wrote.

Gold set a month-end record at 41.4 barrels of crude in June 1973, months before an Arab embargo caused oil prices to surge. The indicator had recorded a succession of lower peaks before its latest advance, as the chart illustrates. The most recent high was 20 barrels, reached in October 2012.

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