• 3 minutes China has *Already* Lost the Trade War. Meantime, the U.S. Might Sanction China’s Largest Oil Company
  • 7 minutes Saudi and UAE pressure to get US support for Oil quotas is reportedly on..
  • 11 minutes China devalues currency to lower prices to address new tariffs. But doesn't help. Here is why. . . .
  • 15 minutes What is your current outlook as a day trader for WTI
  • 3 hours Domino Effect: Rashida Tlaib Rejects Israel's Offer For 'Humanitarian' Visit To West Bank
  • 14 hours Will Uncle Sam Step Up and Cut Production
  • 2 days Movie Script: Epstein Guards Suspected Of Falsifying Logs
  • 20 hours In The Bright Of New Administration Rules: Immigrants as Economic Contributors
  • 16 hours Trump vs. Xi Trade Battle, Running Commentary from Conservative Tree House
  • 3 hours Continental Resource's Hamm (Trump Buddy) wants shale to cut production.Can't compete with peers. Stock will drop in half again.
  • 3 hours Gretta Thunbergs zero carbon voyage carbon foot print of carbon fibre manufacture
  • 1 day Significant: Boeing Delays Delivery Of Ultra-Long-Range Version Of 777X
  • 12 hours NATGAS, LNG, Technology, benefits etc , cleaner global energy fuel
  • 2 days I think I might be wrong about a 2020 shakeout
  • 2 days Kremlin Says WTO's Existence Would Be In Doubt If the U.S., Others Left
  • 52 days To be(lieve) or Not To be(lieve): U.S. Treasury Secretary Says U.S.-China Trade Deal Is 90% Done
  • 2 days Why Oil is Falling (including conspiracy theories and other fun stuff)
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




Oilprice - The No. 1 Source for Oil & Energy News
Download on the App Store Get it on Google Play