Gold/Oil Ratio Extremes

bonnyshi

今天找到了两份2004年和2005年分析黄金和石油关系的文章，正确的反应了现在的情况，那么按照趋势理论，不妨相信还能正确反应未来几年的情况。



Adam Hamilton     August 20, 2004     3698 Words

With crude oil relentlessly marching towards $50 this summer, market commentary is utterly dominated by the potential implications of this major oil upleg.  In fact it is rather amusing to see practically every single negative development in every major market blamed on oil, the new universal scapegoat for Wall Street.

What a convenient excuse too!  While the stock markets remain overvalued in a Great Bear following a supercycle bubble and therefore almost certain to grind lower until their ultimate secular undervalued bottom, conventional investors can continue to blissfully ignore all these timeless truths thanks to oil.  If the markets were to plunge from here, I am certain that oil, and not rampant overvaluations, would be assigned the blame.

But while conventional investors blame oil for all of their bad trades rather than their own folly in buying grossly overvalued stocks during a supercycle bust, contrarians can celebrate this new commodities bull.  Indeed there are positive relationships between oil and other commodities that forecast vast profits ahead for those willing to heed them.  The tight relationship between oil and gold is the primary example.

It is fascinating to realize that the Ancient Metal of Kings, gold, has a very strong positive correlation with the King of Commodities, oil, throughout modern history.  When oil is strong, gold tends to be strong as well.  In fact, the prices of these two commodities are so intertwined over the long term that they seem almost incapable of heading in separate directions over longer strategic timeframes.

This week I would like to consider the powerful gold and oil interrelationship over the past four decades or so.  The implications of our present major oil upleg for gold investors and speculators are enormous and the coming precious-metals profits will be vast if these commodities’ rock-solid historical relationship holds.

Instead of resigning to the self-defeating Wall Street strategy of lamenting and whining about oil rising on global demand growth outstripping global supply growth, why not just accept this as the new reality?  And if the States, Asia, and Europe are unlikely to quit guzzling oil soon, if ever, then why not deploy our capital so we can ride these new strategic trends to great profits?  Regardless of if we personally like rising oil or not, we must adapt to new market realities to be successful in multiplying our capital.

Understanding the gold/oil ratio is one key way to realize why rising oil is not damaging to all markets.  While higher oil prices do tend to slow down the economy as a whole and reduce disposable income for most Americans, which certainly does eventually adversely affect the stock markets, gold shines brilliantly during these very times.  The gold/oil ratio helps quantify this relationship for analysis.  It is simply computed by dividing the gold price by the oil price.

Our trio of graphs this week are updates from my earlier “Gold Boiling in Oil” series of essays.  This line of research is battle tested over time and has already helped us lead our subscribers to huge profits in gold-related investments and speculations in the past four years.

When my original essay advancing these arguments was published over four years ago in June 2000, oil was trading near $32 and gold around $292.  Since then gold has run up nearly 47% while unhedged gold stocks (HUI index) have screamed 340% higher!  It definitely leads to big wins to pay attention to the gold/oil ratio and trade accordingly rather than fretting about higher oil prices.

And, truly, in real inflation-adjusted terms oil prices are not even that high yet in the grand scheme of things.  Our first chart uses the latest US CPI inflation numbers just released this week to show the real prices of gold and oil in today’s 2004 dollars over the past four decades.  All of this talk of new record highs in oil in the news every night, while technically true in nominal terms, is extremely misleading.



Comparing the prices of anything over the long term without considering changes in purchasing power due to the Fed’s relentless printing-press inflation is like comparing apples to oranges.  $45 oil may seem high today to an average American who hasn’t studied market history, but as this real chart shows it is really nothing to get excited about.  Oil was higher than today’s levels for over half a decade in the late 1970s and early 1980s and the world didn’t implode into the dark ages.

Want high oil prices?  Try the staggering $93 per barrel achieved in April 1980 at the top of the last oil bubble!  We are barely even halfway to those stellar extremes today!  As a matter of fact, the average real oil price since 1980 has run nearly $37 in 2004 dollars.  Thus today we are not even that much higher than average yet around $45.  Perspective is everything in the markets, and ignoring inflation in multi-decade price comparisons assures a dangerously skewed view of reality.

Why is considering inflation essential?  Imagine having a $20k income in 1980 when a hamburger cost $1.  Assuming you really liked hamburgers, you had enough buying power to consume up to 20,000 of them per year.  Fast forward to 2004 and assume you are earning $200k in today’s dollars.  If you think back to 1980 and earning only 20k you probably feel very blessed today.  Your 10x gain in income does sound good on paper, but if a decent hamburger runs $10 today then you still only earn enough to purchase 20,000 hamburgers per year.  It’s a monetary wash and you are no better or worse off!

Your nominal income went up greatly, the nominal hamburger price also soared, but in real terms of what your income can buy nothing actually happened.  In this simplified example, all that really transpired is the Fed increased the money in circulation by 10x, hence both incomes and prices went up by 10x while real purchasing power remained constant.

The price of hamburgers, oil, gold, or anything is only relevant over long spans of time in inflation-adjusted constant-purchasing-power terms.  Around $45 in today’s dollars, oil is only half as expensive as it was to Americans in 1980 based on our income levels then.  True new all-time oil highs will not be achieved until oil exceeds $93, and this number is constantly rising as long as the Fed incessantly runs its printing presses.

Based on this chart, oil doesn’t even start to get interesting until it breaks $50.  And I would probably not consider oil prices to be on the high end of things personally unless it gets above $60.  The next time some Wall Street commentator moans about today’s “all-time high oil prices”, realize he is either naïve and has not studied market history, or he is trying to mislead you by intentionally ignoring inflation, or he is outright lying to deflect your attention away from the real issues plaguing today’s stock markets like excessive valuations.

The long-term chart above is also very valuable to help visualize just how closely gold and oil prices tend to correlate over strategic time frames.  If you look at major secular trends measured in years, gold and oil pretty much move in lockstep.  Yes, they deviate tactically over shorter periods of time as their respective supply-and-demand influences dictate, but over the long run they travel the same path.  Their prices tend to oscillate around each other and periodically cross on this chart.

Over the entire four-decade span of time charted on this graph, these monthly gold and oil prices have a correlation coefficient of 0.835 and an R-Square value of 69.7%.  These are very impressive numbers over such a long period of time and really drive home just how closely gold and oil are intertwined.

If you focus your attention on the far right side of this graph, however, a glaring anomaly becomes instantly apparent.  Since oil bottomed near $11 in December 1998 ($13 in 2004 dollars) it has surged up dramatically in several subsequent uplegs achieving a mammoth 312% bull-to-date gain as of this week.  But over the same period of time gold has lagged dramatically, only rallying by 39% or so in nominal terms.  So far the gold price has not been able to even attempt to retain parity with oil in recent years.

Now the only other similar time in history when oil was strong and gold lagged was in the late 1970s.  As this chart reveals, for years gold lagged oil but when it finally did decide to catch up it powered higher with a vengeance.  I believe we are being set up for a similar scenario today, where crude oil blasts higher while gold gets off to a slow start initially.  But eventually investors will realize that gold is radically undervalued relative to crude oil and they will bid up the gold price dramatically in the coming years.

The gold/oil ratio is the perfect tool to help precisely quantify the degree to which gold leads or lags crude oil.  As I discussed regarding the gold/silver ratio in the current issue of our monthly Zeal Intelligence newsletter for our subscribers, any ratio ultimately describes the relative overvaluation or undervaluation of one commodity as expressed in another.

When the gold/oil ratio is high, it means that gold is overvalued relative to crude oil, either that gold is getting too expensive or oil is getting too cheap.  When the gold/oil ratio is low, as today, it means that gold is undervalued relative to crude oil.  Either oil is getting too expensive or gold is getting too cheap.  For a variety of reasons discussed below, I believe that the latter statement is most true today, that gold is just too cheap.

As the latest graph of the gold/oil ratio reveals, this key ratio is currently at its third lowest extreme in history!  The red numbers marking each low correspond with the first graph above.

bonnyshi

----to be continue---------

One of the most fascinating attributes of long-term ratio analysis is the elegance with which it integrates two foundational market principles.  First, all markets abhor extremes.  Nothing stays chronically overvalued or chronically undervalued for long.  Just ask the NASDAQ refugees from their 2000 crash!  Second, a direct corollary to the first principle, over time all valuations revert back to their means, or averages.



When investors identify unsustainable extremes and harness their capital to ride the inevitable mean reversions, it is one of the surest-fire and least risky ways possible to earn massive profits.  My entire Long Valuation Wave thesis on the general stock markets is based on this very idea, as are many other successful investment and speculation theories.



In terms of the gold/oil ratio, today gold is the third cheapest that it has ever been relative to oil in our modern age!  At one ounce of gold only being worth 8.7 barrels of oil today, only the 8.2 barrels in September 1976 and 8.1 barrels in November 2000 have been lower.  In addition to these three all-time extremes, there have been three other slightly lesser extremes in this gold/oil ratio which are noted in the graph above.



Now if you examine all five of the past four decades’ extreme lows in the gold/oil ratio (GOR), there are a couple rather striking attributes that they all share.  First, because the markets abhor extremes, the GOR doesn’t linger for long once it hits an extreme high or low.  Second, because markets always mean revert, each of these extremes is always followed by a mean reversion.  Either oil plunges or gold soars or both to bring the GOR back into line.



This chart highlights the four-decade GOR average line in white, which happens to be at the level where an ounce of gold will buy 15.4 barrels of oil.  In addition, we drew in standard-deviation lines to help judge the degree of extremes.  By definition, 68.3% of the data points are within one standard deviation of the mean, 95.4% are within two standard deviations, and a whopping 99.7% are within three standard deviations.  The farther out that a particular GOR extreme is from the mean, the rarer it is statistically.



Now please consider the past five extreme GOR lows before today’s.  Using the standard-deviation and average bars drawn in above we can roughly quantify the degree of mean reversion, and often overshooting, after each extreme low.  For example, after September 1976’s extreme GOR low of 8.2 the GOR ratio quickly mean reverted and overshot to +1 standard deviation.  Since it traveled from approximately -1 SD to +1 SD, we can say it moved 2 standard deviations in rough eyeball terms.  The actual precise number from the raw data is 2.5 standard deviations.



The second GOR extreme, June 1982’s 9.0, ended up mean reverting about 1.6 standard deviations back up to its average.  The third, November 1985’s 10.6, blasted from -1 to +3 or through an amazing 3.9 standard-deviation bands.  Four and five weighed in at 3.2 standard deviations and 1.3 standard deviations respectively.  If we average these mean reversions we get a typical expected surge higher of 2.5 standard deviations after an extreme GOR low.



The standard deviation of the gold/oil ratio is running right at 5.0.  If today’s GOR follows historical precedent and mean reverts back up 2.5 standard deviations, we are talking about a 12.5 addition to today’s extremely low GOR.  Thus, a potential target gold/oil ratio in the next inevitable mean reversion is 8.7 plus 12.5, or 21.2.  And as you can see above, a 21.2 GOR is barely above +1 standard deviations so it is not a rare event by any stretch of the imagination and is actually quite probable.



What does all this mean?  Don’t let the necessary statistical mumbo jumbo cause your mind to zone out, because the implications to gold investors are profound and potentially enormously profitable.  If today’s extreme GOR low around 8.7 catapults up to 21.2 in the years ahead, which is merely an average mean reversion, what will this portend for the price of gold?



We should consider this in three scenarios, oil rises, oil falls, or oil flatlines.  I personally believe oil is going to rise significantly over the long-term, but in fairness all three scenarios should be considered.



While oil may be overbought short-term, I believe it is in a long-term bull market.  On the supply side major new oil deposits are getting harder and harder to find.  Unfortunately it appears that the world as a whole is reaching its Hubbert Peak of production, the peak-production level at which existing fields will never yield greater numbers of barrels per day and will actually start declining as they are depleted.  Some major oil companies have been restating their reserves downwards and none of the majors are succeeding in growing supplies fast.  Even the mighty OPEC claims it is running near capacity!



On the demand end as we Americans know better than anyone else, once one experiences a first-world oil-rich lifestyle it is almost impossible to go back.  Billions of people in China and India alone, let alone the rest of Asia and former Soviet-block European countries, are finally getting their first tastes of an oil-driven first-world civilization.  They are unlikely to suddenly stop driving cars, transporting goods, or moving people.  On the contrary, their per capita oil demand should ramp up vastly and eventually start approaching American levels.



With global demand growth far outstripping global supply growth, oil could rise for a decade or more until some wild new technology manages to displace it as prices get too high.  Let’s be really conservative and assume a $60 per barrel average price in the coming years if this scenario plays out.  A gold/oil ratio mean reversion to only 21.2, not even extreme on the upside, would yield a target gold price of $1272!  That is up 215% from today’s levels.



Now the Wall Street scenario of choice today is that oil is chronically overvalued and falls dramatically.  Perhaps massive new Siberian deposits are found and come online, or spectacular new deep-water drilling technology is developed.  And maybe the economies of China and India slow down so oil demand growth in Asia abates.  Let’s assume oil falls all the way down to $30 in this scenario, a price which I suspect is ridiculously low given today’s immensely bullish supply and demand fundamentals for crude.



At $30 oil and a 21.2 gold/oil ratio mean reversion, we are still looking at $636 gold.  This is 57% higher than today’s levels.  Thus, even in a near doomsday scenario where oil prices plunge to $30, the current GOR extreme is so obnoxious on the low side that gold will have to surge higher anyway to bring this ratio back into line.  Talk about a good speculation!



A final scenario is oil flatlines near $45 in the coming years, neither rocketing towards $60 and beyond nor plummeting to $30.  At a GOR of 21.2, $45 oil means $954 gold, or a massive 136% gain from here.



Isn’t this exciting from a contrarian perspective friends?  The gold/oil ratio is so extraordinarily low today that gold prices will have to go much higher when this ratio inevitably mean reverts even if oil falls dramatically.  And you can play with these numbers as much as you want, including reducing the expected mean reversion, and it is still very bullish for gold no matter what happens to oil prices in the years ahead.



This is why betting with a mean reversion near a historical extreme is such a high-probability-for-success trade.  By all historical standards gold is just far too undervalued today relative to oil, but the markets abhor extremes and they will mean revert to correct this one sooner or later here.  If you are long leveraged gold investments and speculations like quality unhedged gold stocks when this happens, you will probably earn a fortune.



Our final graph presents this gold/oil ratio from a different perspective called the gold cost of crude oil.  It tells us how many ounces of gold it takes to buy 100 barrels of oil at any given time in modern history.  At the four-decade average of 7.1, for example, it means that a buyer would have to sell 7.1 ounces of gold to raise the cash necessary to buy 100 barrels of crude.  This alternative view of the GOR offers additional insights.

Not surprisingly as a gold/oil ratio derivative, the gold cost of crude oil is also at its third most extreme level in modern history.  At 11.5 ounces of gold for 100 barrels today, only September 1976’s 12.2 and November 2000’s 12.4 are greater.  And if you look at the five previous extreme gold-cost-of-crude-oil spikes, they all reverted rapidly back to or through the mean without exception.  Odds are today’s extreme will follow suit.

So let’s assume that today’s gold cost of crude oil (GCCO) mean reverts from 11.5 back merely to its average of 7.1, a very conservative assumption since four of the five previous GCCO extreme highs reverted well below the mean.  What would this portend for the price of gold in our three different oil scenarios discussed above?

At secular-bull $60 oil, 100 barrels of crude would be worth $6000.  If it takes 7.1 ounces of gold to buy this shipment of oil, then the gold price would be $845, or 109% higher than today’s levels.  At flatlined $45 oil, this 7.1 GCCO yields a gold price of $634, 57% higher than current levels.  And at doomsday $30 oil, we are looking at $423 gold which is still a modest 5% above today’s status quo.

This third most outrageous gold/oil ratio extreme in history that we see today is so fascinating and so important because its inevitable mean reversion virtually guarantees a major rise in the price of gold from current levels.  By modeling merely average to below average mean reversions and oil prices ranging from 33% higher to 33% lower than today’s, we saw a range of potential gold gains running from 5% on the extreme low end to 215% on the high end.

Since the current gold/oil ratio extreme seems to be telling us that a continuing gold bull is inevitable, it makes great sense to invest and speculate in gold-related plays.  My long-time favorite leveraged gold investments and speculations are quality unhedged gold stocks, which greatly leverage the underlying gains in gold.

For example, bull market to date in gold, the HUI unhedged gold-stock index has leveraged the Ancient Metal of Kings by 6.2x on average during each major upleg.  So if gold runs up 5% to 215% higher as the gold/oil ratio mean reverts in the coming years, the best gold stocks could see gains running from 31% in an oil doomsday scenario to 1333% or higher during a continuing oil bull market.  That’s a heck of a lot of potential upside in my book with very minimal downside risk!

If you don’t want to put in the long years of research time necessary to uncover the great gold opportunities yourself, please consider subscribing to our acclaimed monthly Zeal Intelligence newsletter.  My partners and I analyze and monitor these incredible gold and silver opportunities every month and recommend new trades as appropriate.  We are currently trading elite gold and silver stocks, highly-leveraged gold-stock options, and are always looking for new ways to profitably ride this ongoing gold bull.

The bottom line is today’s incredibly low gold/oil ratio extreme is absolutely unsustainable in light of historic precedent.  The markets abhor extremes and always mean revert away from these extremes.  Riding these inevitable mean reversions is one of the most profitable and least risky strategies possible for investors and speculators.

And since gold is so ridiculously undervalued relative to oil today, it really doesn’t matter where oil goes.  Whether oil soars or slumps, a gold/oil ratio mean reversion is going to push gold higher, probably a whole heck of a lot higher, in the years ahead.

Rather than whining about the oil upleg like the myopic Wall Street shills, why not ride this coming gold/oil ratio mean reversion up to potentially legendary profits in your own portfolio?  Put the oil bull to work for you!

bonnyshi

这是第二份，写于2005年八月

Adam Hamilton     August 19, 2005     3406 Words



Crude oil has been soaring this year, as irate commuters all over America are lamenting.  Since January it has blasted from $42 to $67 per barrel for a massive 60% year-to-date gain.  2005 has already proven to be the most fascinating episode in the oil markets in a quarter century, truly remarkable.



While I understand why rising gasoline prices irritate folks, as an investor I remain in awe of the wondrous opportunities presented by this secular commodities bull.  Oil is just one facet, albeit extraordinarily important, of a broader long-term march higher by all kinds of essential commodities.



Some of the most amazing opportunities of this Great Commodities Bull exist because some of these commodities are interrelated.  Interrelationships are well understood in the stock markets, such as the tendency of one sector to move in correlation with another sector.  If sector A and B are highly correlated historically, and A is up but B is not, then savvy investors buy stocks in B and wait for the relationship to revert to its usual tendency to run parallel.  Eventually B will catch up with A’s advance.



Unfortunately though since it has been a few decades since the last great commodities bull, today’s investors have largely forgotten its lessons.  Interestingly there are all kinds of very strong historical interrelationships among commodities, glued together via similar supply/demand profiles, responsiveness to similar economic conditions, and other fundamental factors including monetary expansion and geopolitics.



One of the most powerful historical commodities interrelationships exists between oil and gold.  This is fitting.  Oil is the most important commodity on earth since almost everything tangible that we physically move burns oil in the process.  And gold has been the ultimate form of money through six millennia of human history, utterly immune to the inevitable debasement and inflation that all paper currencies eventually suffer.



This key relationship is easiest to understand when expressed as a ratio, the Gold/Oil Ratio or GOR.  It simply takes the market price of gold divided by the market price of oil and the result is charted across the seas of time.  The really fascinating part is this ratio has traded within a well-defined range since just after World War 2, nearly 60 years.  Any trend persisting for this long must be taken seriously by investors.



The GOR research presented today is the latest in a long thread of analysis that I started back in June 2000.  Back then gold was running at $292 and crude oil only cost $32 per barrel.  At that time the GOR was low but still well above historical extremes.  But in just the past few months the GOR has dived to new all-time record lows that likely represent dazzling opportunities for investors who position themselves to ride the GOR back up into normal territory.



Before we delve into the mathematical abstraction of the Gold/Oil Ratio, it is important to gain a strategic perspective on its components.  The following chart shows monthly oil and gold prices since 1965, adjusted for inflation using the US Consumer Price Index.  Visually the interrelationship between these two elite commodities is quite stunning.  Generally as goes one so goes the other.


With the notable exceptions of 1975 to 1976, 1998 to 2001, and 2004 to today, oil and gold tend to move in undeniable symmetry.  While there can certainly be temporary spikes higher or lower in either commodity, over a long strategic time frame their secular trends synchronize incredibly well.  Temporary anomalies in one not mirrored by the other are eventually erased as their high correlation reasserts itself.

Back in 1975 oil in today’s dollars was holding steady near $40 a barrel but gold was falling rapidly from around $700 real to just under $375 real.  This anomaly caused the first great Gold/Oil Ratio extreme low, all of which are numbered in red on each chart in this essay for reference.  At that low there were only three possible events that could happen to the GOR.  Oil could plunge to match gold, gold could soar to match oil, or the ratio could be broken with oil and gold heading their separate ways.

How was it resolved?  The chart speaks for itself.  Gold rocketed from $375 in today’s dollars to nearly $1700 on a monthly basis in the greatest gold bull in modern history.  Gold not only caught up with oil to preserve the GOR, but it easily blew past crude as a speculative mania seduced mainstream investors to buy more gold.  Gold ultimately ran up over 1800% in nominal terms in the 1970s while oil pushed 1100%, both on monthly bases.  Naturally vast fortunes were won by commodities investors of the time.

This 1970s Great Commodities Bull pushed both elite commodities up to their all-time inflation-adjusted highs as well.  In today’s dollars, oil exceeded $95 per barrel in April 1980.  Gold ended January 1980 at $1690 in today’s dollars, truly impressive.  And while this chart is composed of monthly data, if gold’s all-time daily closing high on January 21st, 1980 is considered in 2005 dollars, it now runs about $2140 per ounce!

These all-time highs are important to consider as we ponder the GOR extremes evident today.  At $67 today oil is already three-quarters of the way to hitting new all-time real highs.  But gold, at $440 today, is only one-quarter of the way to achieving new record highs.  Bull to date crude oil is up nearly 500% in recent years while gold is pushing just 70%.  Just as in 1976 we are presented with three scenarios … gold soars, oil collapses, or the GOR relationship implodes.  Which will it be?

Back in 1998 to 2001 a somewhat similar scenario unfolded.  Oil was driven down to absurd all-time real lows that were unsustainable, below the cost of production for most of the world outside of the Middle East.  After falling under $14 in today’s dollars, oil then started rallying and ultimately hit $38 real in late 2000.  But during most of this time period gold was languishing, grinding lower from $330 to under $290 in 2005 dollars.

In 2000 and 2001 investors faced the same dilemma we face today.  Oil and gold have a very high historical correlation, as goes one so goes the other ultimately.  Since the GOR was hitting its fifth major extreme low ever, an all-time record at the time, investors had to decide if the venerable ratio trading range was still valid.  Either oil could plummet, gold could rally, or the ratio could be broken.  The ratio ended up holding solid and gold embarked on a new secular bull.

With gold essentially flat in real terms over the last 18 months or so and oil more than doubled, today we are once again facing the same question investors faced in 1976 and 2001.  Is the GOR even valid anymore in our modern world?  If it is, then is oil destined to collapse or is gold destined to soar to bring the ratio back in line with its long history?

The six-decade old GOR relationship could certainly end at anytime, anything is possible in the markets.  But odds are it won’t.  Gold and oil are both tangible and finite assets, they can’t just be wished into existence but instead vast amounts of capital must be expended to recover them.  Since they are both real, they tend to feel the effects of inflation similarly.  As the US Federal Reserve continues its dangerous course of printing perpetually spiraling amounts of paper money, more paper will bid on gold and oil driving up both prices at the same time.

In an inflationary fiat-paper regime such as the ones that exist in every country on the planet today, money supplies are guaranteed to grow faster than commodities supplies.  As relatively more money bids for relatively less commodities, higher commodities prices are the inevitable result.  To bet that the GOR is going to suddenly fail is not only to bet against six decades of history, but to somehow assert that fiat-paper inflation will miraculously cease so monetary pressures don’t push up gold and oil simultaneously.

If you don’t think central banks are going to dissolve and return to intrinsic money that can’t be inflated, then there is little sense in betting that the long GOR trading range will shatter.  All throughout history gold and all tangible commodities have risen in concert during inflationary times, and today will not be an exception.  As long as central banks exist, increasing money supplies will lift all commodities including gold and oil and probably help preserve the longstanding GOR trading range.

If the GOR is unlikely to break, then we are faced with either oil falling or gold soaring to restore the ratio.  Oil is overbought today and should indeed correct sooner or later here as all bull markets do periodically, but when it corrects it is likely to bounce near its 200-day moving average.  Once it gets under 95% of its 200dma it will be oversold and another strong buy signal will trigger.  With oil’s core 200dma now running above $52, a major correction to 95% of this would yield a high-probability technical downside target near $50.

But even if oil manages to correct back to $50 or under temporarily, strong fundamentals are still driving its underlying bull.  On the demand side half the world’s population is rapidly industrializing in Asia and its oil consumption will continue to skyrocket.  Even if Asia never reaches American per-capita oil-burning levels, its growth will constrain global oil supplies for decades.

And on the supply side, despite the countless billions of dollars spent searching for more oil, no new major oilfields have been discovered worldwide in decades.  Existing fields are depleting rapidly and it is becoming more and more costly to extract the oil since the low-hanging fruit was picked in the last half century.  Even the biggest of the world’s elite major oil companies cannot find enough new oil to replenish their reserves annually.

With oil unlikely to go much below $50 technically in a typical correction and its supply and demand fundamentals so unbelievably bullish, I think it is a silly bet to assume oil will plunge and its bull market will end.  This oil bull will probably last another decade or more along with the general commodities bull.  If the GOR is unlikely to break and the oil bull is unlikely to lay down and die, that only leaves gold soaring to fix today’s extreme GOR ratio.

What would it take for gold to soar?  Virtually nothing compared to oil.  Gold is the safest investment in world history, the ultimate hedge against inflation and government meddling in monetary affairs.  Since so few people in the First World own gold these days, all it would take for gold to skyrocket would be some modest fraction of investors, say a quarter, deciding to diversify a few percent of their portfolios into physical gold.  The resulting explosion of gold investment demand would be stunning and higher prices would beget even more demand.

So today’s extreme GOR lows must be resolved in one of three ways.  The GOR could break forever, but such an event is extraordinarily unlikely as long as central banks inflate paper money supplies.  The oil bull market could end, but how could that happen with soaring demand and dwindling supplies worldwide?  And gold could soar, which would only take more investors around the world deciding to diversify a small portion of their capital into gold.  I believe this latter gold scenario is the most likely outcome.

With the probabilities clearly in favor of a gold rally to resolve the current GOR extreme low, just how extreme is it?  Believe it or not, today the Gold/Oil Ratio is at its lowest level in history by far.  Prior to this summer the average GOR extreme low, of which there had only been five in three decades, was 9.3.  Today the GOR is at 6.6, a whopping 30% below previous historical average extreme levels

bonnyshi

----to be continue---------

Today’s incredibly anomalous GOR extreme means that an ounce of gold costs just 6.6x a barrel of crude oil.  Digesting this four-decade chart should give you an idea of just how rare any GOR extreme lows are, let alone one shattering all-time records.  Note also in each previous GOR extreme low case that the ratio didn’t linger at extremes for long, but promptly shot back higher at least up to the long-term average of 15.2.



To better understand the probabilities of where the GOR tends to trade within its long range, standard deviation bands are overlaid on this chart.  Statistically the GOR should be within +/-1 standard deviation from its average 68.3% of the time, +/-2 SDs 95.4% of the time, and +/- 3 SDs 99.7% of the time.  Today the GOR is nearing the -2 SD line for the first time in history, truly a remarkable event.



Now after past extreme lows, the GOR has mean-reverted dramatically every time.  One extreme rocketed all the way up to +3 SD, one extreme blasted up to +2 SD, one rallied to +1 SD, and two returned to average.  So while we have plenty of precedent for mean reversions overshooting dramatically to the upside, we can be really conservative by just anticipating a mean reversion of the GOR to merely average this time around.  So far this event has had a 100% chance of happening after each prior GOR extreme low.



Rather than assuming oil will stay high, let’s add even more conservatism to this analysis by assuming it will correct back down under its 200dma, as it has already done periodically several times in this bull to date.  A probable target under oil’s 200dma is around $50, which has the added benefit of being a nice round number for easy calculations.



So if oil corrects to $50 before its next major upleg erupts, and the GOR simply reverts back to its mean and doesn’t even overshoot to the upside as it is prone to do, how high will gold have to go to restore balance to this ratio?  At a 15.2 average GOR and $50 oil, gold would have to trade to $760 per ounce!  And obviously if you believe the GOR will once again overshoot to standard deviations above its mean, the resulting target gold price to restore the ratio would be far higher.



If the GOR is not broken, and if oil corrects dramatically, and if the ratio merely reverts back to its mean and doesn’t overshoot, which are all conservative assumptions, gold would have to rally 73% from here to bring the GOR back in line!  Savvy investors can ride this probable move easily by deploying capital in gold and gold-related investments like gold stocks.  Today’s all-time record GOR extreme low is extraordinarily bullish for gold.



A related but inverted way to measure the strong historical relationship between gold and oil is via the Gold Cost of Crude Oil, or GCCO.  It states how many ounces of gold it has taken throughout modern history to buy 100 barrels of crude oil.  This key metric has also shattered all records and hit a dazzling new all-time extreme, but to the upside.  In standard deviation terms this is so rare, nearing +4 SD, that it is certainly unsustainable and likely to start falling fast soon.



Last time I wrote on this crucial gold and oil interrelationship in early April the GCCO was running 12.9, its highest levels ever but still within +3 standard deviations.  Nearly 20% higher now, 15.2 ounces of gold per 100 barrels of crude, these levels are mindboggling.  Oil has never been more expensive in gold terms, oil producers have never been able to trade oil for as much gold as is being offered today.  This has to be an anomaly.

Once again oil prices aren’t the problem, as rampant demand growth and dwindling supplies fully explain the secular bull market in crude oil.  But gold is way, way undervalued compared to oil.  It has lagged behind in its own bull market for so long that it has just become extraordinarily cheap relative to other commodities.  While oil will probably correct sooner or later here, most of the work in restoring the GCCO will have to be done by a major gold upleg.

Of the five previous extreme GCCO highs numbered above, all collapsed right after the spike high was achieved.  One collapsed all the way back down to -2 SDs, two mean reverted and overshot to -1 SD, and another two returned to below the average.  Since all five fell below the GCCO average though, it is the most conservative point at which to project the coming mean reversion.

If oil corrects to $50, 100 barrels of it will be worth $5000.  At the four-decade average Gold Cost of Crude Oil of 7.2 ounces per barrel, this yields a target gold price of $694 per ounce.  Thus if the GCCO mean reverts back to its average as history strongly suggests it ought to, the gold price would have to rally 58% from here to make it so.  Once again this is extremely bullish for gold.

Gold and oil, since they are both finite and scarce tangible commodities, are forever bound together since they exist in a rampantly inflationary world.  The more paper currency that the world’s central banks decide to inject into their economies, the more paper will compete for finite gold and oil supplies.  As relatively more paper bids on relatively less gold and oil, their prices have no choice but to rise.  A rising inflationary sea of paper currency lifts all tangible boats.

While oil can and should correct, its underlying supply and demand fundamentals remain extremely bullish.  Global consumption of oil is climbing around the world yet the oil pumped each year is not being replenished.  And if the world is really passing peak oil production as many energy geologists believe, then the supply situation is unlikely to ever improve materially.  This oil bull isn’t even close to being over.

This leaves gold.  During inflationary times, which these undoubtedly are despite the watered-down government statistics, gold shines the brightest.  By diversifying into gold investors can preserve their purchasing power from the ravages of inflation as well as weather the ugly secular bear market in the general stock markets in style.  It will only take a modest fraction of investors diversifying a small percentage of their portfolios into physical gold for investment demand to overwhelm tight gold supplies and cause its price to soar.

In addition to gold, gold-related investments should also thrive.  One of my favorites is gold stocks, which leverage the underlying gains in gold tremendously.  In anticipation of the next major gold upleg driven by the GOR extreme as well as other macro factors, this year we have been extensively researching and deploying into the most promising of the world’s gold miners.  Once gold starts moving in earnest, elite unhedged gold stocks will soon rocket higher.

The current August issue of our acclaimed Zeal Intelligence monthly newsletter outlines our favorite gold stocks to ride this highly probable gold upleg.  As the GOR mean reverts and gold powers higher, all these companies ought to soar.  Please join us today while these stocks are still relatively inexpensive!

The bottom line is the venerable Gold/Oil Ratio has traded in a well-defined range for six decades, which is far longer than most of us have even been investing.  And gold has never been this cheap before relative to oil, we are so far into all-time record territory here it is just silly.  With markets hating anomalies and having overwhelming tendencies to mean revert, odds are these extremes will not last.

Until governments can conjure up oil and gold as magically as they print paper money now, odds are oil and gold will rise together on a relentless inflationary tide.  Physical commodities supplies will never grow as rapidly as paper money.  This common monetary ground between oil and gold suggests that the GOR is unlikely to suddenly forever leap out of its long trading range.

And if the GOR trading range remains intact and mean reverts, the lion’s share of this reversion must be driven by a major gold upleg.  Oil fundamentals are far too tight for it to fall much beyond a correction and it really won’t take much investment capital in the grand scheme of things to catapult gold higher.

bonnyshi

I found these on YouTube. Interesting to watch the progression from ores in the ground, to 400oz bars, to the bullion coins we're all so fond of.


Gold mining & crude gold:
http://www.youtube.com/watch?v=apD5cPVsDjc

Crude gold to 400oz 9999 bars:
http://www.youtube.com/watch?v=nQ37SFKahc0

Refined gold to bullion coins:
http://www.youtube.com/watch?v=Ef_wJH4z5Dw

litaoo

谢谢！！！

吕颖

赞一个！

bonnyshi

GOR 比例 又达到了历史底部的6.5

比较稳妥的套利方法是多黄金，空原油。
比较激进的交易方法是多黄金。

yee2001

值得关注啊

young

原油的调整已经箭在弦上了

暴涨

我持有纸黄金，有点想卖了

njmmss

谢谢转帖啊，不错。

stevenwu

楼主能将文中中心思想加粗就最好了～
像中学里做阅读概括中心一样

young

原油貌似开始调整了