Monday, December 8, 2014

Gold v. Oil. One Works, the Other Gets Worked Over




Last Tuesday, we looked at the prospects for Gold and Oil (black gold) (‘Yellow or Black Gold, Which if Either to Believe!’) and therein I suggested that the yellow metal would outperform.  At that time, one could have purchased 17.7 barrels of Crude with an ounce of gold.  Right now, you can purchase 19 or more than an additional barrel for the same ounce.  A covered position, without leverage would have improved by 7.3% in less than a week.  

 

There have not been a lot of fans for gold over the last year, but compared with some other commodities, gold has started to show its ‘store of value’ characteristics.  Many would argue with my long standing expectation – at the onset of the financial crisis, that the Fed would likely ease too much and too late and that gold would do well after the Fed finished its accommodation campaign.  

 

Much that could not have been anticipated back in 2007 has transpired though we might all agree that extraordinary measures have been made by the Fed in an effort to support economic growth and price stability.  I have agreed with much of what the Fed has done over the last 7 years, especially the level of visibility provided in their endeavors toward transparency.  It may not seem clear today that the Fed has over-managed this recession and recovery period and that gold will rally as a result of renewed inflation concern.  Still, the party suite where Gold Bears have been celebrating is very crowded and even if you wanted to get in, you would have to wait for someone to depart else no one would be able to lift there celebratory drinks to their lips.  

 

As to oil, I have not seen anything on the charts that says it is a screaming buy.  Until such point, I am very hesitant to suggest trying to catch this falling knife.  

 

The ratio spread shown has not reached this level since December 2012.  Based on the 17.73:1 ratio, it got as high as 390 back in August 2011.  If gold finds its balance, an ounce of this the yellow metal be able to purchase upwards of 25 or more barrels of crude.      

 

 

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