• 2 minutes California to ban gasoline for lawn mowers, chain saws, leaf blowers, off road equipment, etc.
  • 6 minutes China and India are both needing more coal and prices are now extremely high. They need maximum fossil fuel.
  • 11 minutes Europeans and Americans are beginning to see the results of depending on renewables.
  • 1 hour GREEN NEW DEAL = BLIZZARD OF LIES
  • 5 hours Monday 9/13 - "High Natural Gas Prices Today Will Send U.S. Production Soaring Next Year" by Irina Slav
  • 15 hours "A Very Predictable Global Energy Crisis" by Irina Slav --- MUST READ
  • 7 hours Two Good and Plausible Ideas about Saving Water and Redirecting it to Where it is Needed.
  • 2 days Did China cherry-pick the factors that affected the economic slow-down?
  • 2 hours Putin and Xi have decided not to attend the Climate Summit in Glasgow
  • 19 hours "Here is The Hidden $150 Trillion Agenda Behind The "Crusade" Against Climate Change" - Zero Hedge re: Bank of America REPORT
  • 22 hours Are you aware of Oil Price short videos on our energy topics?
  • 2 hours The Climate Scare Stories Began With Far Left Ideology Per GreenPeace Co-Founder
  • 1 day Is China Rising or Falling? Has it Enraged the World and Lost its Way? How is their Economy Doing?
  • 1 day NordStream2
  • 411 days Class Act: Bet You've Never Seen A President Do This.

Breaking News:

California Gasoline Prices Are Spiking

Gold Prices Slide To 10-Month Low

Gold Prices Slide To 10-Month Low

Gold prices continued to slide on…

Will Gold Hit A New All-Time-High This Year?

Will Gold Hit A New All-Time-High This Year?

Enormously inflated money supply and,…

One Junior Miner May Have Sparked A New Gold Rush In Canada 

One Junior Miner May Have Sparked A New Gold Rush In Canada 

An up-and-coming gold exploration company…

Brian Noble

Brian Noble

Brian Noble is principal with Financial Communications in Toronto, Canada which specializes in communications initiatives for the Canadian and global financial services industry. Brian Noble MA,…

More Info

Premium Content

What Gold Can Tell You About Oil Prices

It’s human nature to pay close attention to market indicators when they seem to be working and show neglect or indifference when they’re not. That is not, however, necessarily the way to buy low and sell high.

Take the WTI crude oil to gold ratio. This is one of the oldest indicators in the market, comparing the price of the world’s most traded commodity with the world’s oldest store of value. For that reason, there is a large data set from which to draw. In addition, gold has always played an important role in commercial transactions and in particular with crude oil in the Middle East. Aside from the gold culture prevalent in the region, transactions were frequently conducted in gold for crude before any kind of sophisticated financial infrastructure was in place. When a number of major countries brought a change to end the decades-old practice of buying and selling oil in U.S. dollars in 2009, gold was included in the currency basket in addition to all the usual suspects. As recently as 2012, in a widely-reported event, Turkey exchanged nearly 60 tons of gold, worth about $3 billion, for several million tons of Iranian crude oil to circumvent Western sanctions against Iran’s energy sector. One suspects that wasn’t an isolated event. Related: The Wealthiest Oil & Gas Billionaires In The U.S.

Since World War 2, the annual average ratio has reflected the fact that one ounce of gold could buy precisely 14.83 barrels of oil. Therefore, whenever one ounce of gold can buy more than 14.83 barrels of oil, either oil is comparatively cheap or gold is comparatively expensive. Conversely, whenever an ounce of gold can buy fewer than 14.83 barrels, then oil is expensive or gold is cheap. Spread traders and hedgers pay attention to changes in this ratio to create arbitrage opportunities which are in a sense directionless because they are predicated on convergence or a form of mean reversion.

Currently, the ratio, which bottomed at about 21 at the end of 2016 (see chart), has risen to just over 26. Most importantly, as Dennis Gartman remarked recently (The Gartman Letter, 24 March 2017), the ratio has now clearly broken the trend line that had been established since it peaked in early 2016 at just above 45. So 45 barrels per ounce reflects very cheap oil or very expensive gold; 21 reflects very expensive oil or very cheap gold.

This kind of information can either constitute fodder for a game of Trivial Pursuit or a trading opportunity. Generally, the weaker the ratio, the higher the probability that gold will rise in value and oil will fall, which suggests a pair trade that is still viable. Trade execution implementation could be through short WTI futures and long Comex gold, or via the relevant ETFs, or using cash and/or futures options to create comparable synthetic exposure. Timing is everything, but it may also be possible to leg into the position on a pro rata basis. Follow the Commitments of Traders (COT) report each week from the U.S. CFTC of speculator/investor and commercial interest in the underlying futures markets as your preferred sentiment indicator. Blather from raving gold bulls or blither from OPEC’s propaganda machine is infinitely less reliable. Related: Asia’s Top LNG Players Forming Buyers Club

There are no guarantees in life, but no one ever went broke buying cheap and selling dear.

(Click to enlarge)

Since bottoming at the end of 2016 at roughly 21, the ratio has jumped to around 26, an increase of almost 24 percent.

(Click to enlarge) 

By Brian Noble for Oilprice.com

More Top Reads From Oilprice.com:


Download The Free Oilprice App Today

Back to homepage





Leave a comment
  • Sure on April 01 2017 said:
    And where precisely, in the suggested trade idea, does the (on-average) one ounce of gold = 14.83 barrels of oil FIT in? Clearly not well thought out, given 21 is above this level and the trade idea goes against what just said at the beginning of the article.

    Please.

Leave a comment




EXXON Mobil -0.35
Open57.81 Trading Vol.6.96M Previous Vol.241.7B
BUY 57.15
Sell 57.00
Oilprice - The No. 1 Source for Oil & Energy News