The falling gold-oil ratio

Either the price of oil is too high or the price of gold is too low. That's what a lot of people are saying these days after looking at the historical relationship between these two important commodities. This report from Resource Investor has the details.

The gold to oil ratio has been falling in 2007 with oil prices increasing at a faster rate than gold. The ratio now sits around 8.45 barrels to gold ounce, the lowest all year. With gold hitting 28-year highs and oil at all-time highs, the question now becomes: Is oil too high or is gold not high enough?
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This year, the ratio has averaged about 10.05 bbl/oz, hitting a multi-year high of 12.53 bbl/oz on January 18, and lows of 9.20 bbl/oz in late June.

With the 36-year average near 17 bbl/oz, followers of this correlation see gold moving much higher.

Norman (Ross Norman, Director of BullionDesk) said at a ratio of just 14 to 1, gold would be $1400 an ounce.

But the ratio is more of a long-term gauge and not on a month to month, year to year trend, he said. Near-term price direction is difficult to predict trading the ratio.

Dennis Gartman, editor of the Gartman Letter and a long-time trader of this correlation, recently gave up on the trade. He had once said he wouldn’t be happy until it returned to 11 bbl/oz, and the ratio hasn’t hit that level since March.

Price ratios of tenuously connected commodities, stocks, etc. have never made much sense to me, though a lot of people seem to like them.

Suppose they emptied Fort Knox (which it sounds like they have started to do) at the same time that a full conflagration breaks out in the Middle East. If the price of gold were to go to $200 and the price of oil were to meet it there, what difference would the 1:1 ratio make?

On a longer term basis, what if the worst case scenario for Peak Oil unfolds in the years ahead and then all the central banks in the world decide they no longer need any of their gold bars? Would $100 gold and $300 oil have any real significance?