Gold / Oil ratio refers to how much crude oil can be bought with one ounce of Gold. With gold at $840 per ounce and oil at $42 per barrel, the Gold/Oil ratio is at 20. The average for the last 40 years has been around 15.
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The gold-oil ratio identifies:
– Buying opportunities (for gold) when the gold-oil ratio turns up at/below 10 barrels/ounce; and
– Selling opportunities when the gold-oil ratio turns down at/above 20 barrels/ounce.
– Selling opportunities when the gold-oil ratio turns down at/above 20 barrels/ounce.
But 15 turns out to be the historic average for the ratio. So if the ratio is rising, what does it mean? It means either oil is oversold or gold is overbought. For the ratio to return toward its historic average, oil prices would have to rise, or gold prices to fall.There's no rule that says the ratio must return to 15, only that 15 is the average level.
Currently the Gold-Oil ratio is near 20 as shown in the chart ( $GOLD:$WTIC ). The Gold-Oil ratio crossed the important value 10 during mid of October 2008 leaving a buy signal in gold
Though gold is at oversold level, what happens if the Gold-Oil ratio keeps on increasing?
Some of the Possible Cases are :
1)In medium term either Crude should decline further with stable gold prices
2)Crude prices should remain constant and gold prices should move higher
Now its interesting to track Gold-Oil ratio in coming days!!!
