Wikinvest Wire

Changing leads in the oil-gold tango

Monday, July 21, 2008

An increasing number of observers (including myself) tend to agree with the premise of this WSJ story($) regarding the near-term outlook for oil and gold though, admittedly, one Gulf Coast storm or one wayward Middle East missile could change that very quickly.

While never a big believer in the merits of the "oil-gold ratio" as a predictive tool, it may be telling an important story at the moment.

Gold May Benefit as Oil Falls
Yellow gold, which often tracks the crude-oil market, could outperform black gold in the foreseeable future because of financial-sector and inflation jitters.

Some analysts also suggest that the rally in oil prices this summer may be overdone, which could lead to the metal's strength.

The gold-oil ratio -- which measures how many barrels of oil it takes to buy one ounce of gold -- has risen to more than 7 from 6.3 recently, said Peter A. Grant, senior metals analyst with USAGOLD-Centennial Precious Metals Inc.
The historical average for the gold-oil ratio has been closer to 13 to 17. BMO Capital Markets says the range since 1975 has been mostly from 6.5 to 30.

"Historically, the gold-oil ratio has been much, much, much higher than it is today," said Bart Melek, global commodities strategist with BMO.
Of course, all you had to do was look at the mid-year gain of over 50 percent for oil and about 11 percent for gold to have a reasonably good idea which one would do better in the second half.

Note that, as of this morning, the year-to-date gain for oil has shrunk to about 35 percent and gold's gain has increased to 15 percent.

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