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Oil-Gold Ratio At Critical Level

Published 06/12/2015, 11:40 AM
Updated 05/14/2017, 06:45 AM

Gold (ARCA:GLD) and oil (NYSE:USO) both have long histories. Both have taken a turn as a consolidator of power and wealth. And both have withstood the test of time. The last few years though they have become very interesting commodities in a different way. gold quit a 10-year uptrend. It has moved slightly down or sideways for nearly 4 years now. And oil went from being the commodity that would give the US energy independence through shale to crashing and burning with over supply and strong substitutes like solar and wind.

But gold and oil have a relationship together as well. Lately that relationship had swung in favor of gold. But with the start of 2015 that has begun to change. And now the ratio of the two commodities stands at an important level.

Light Crude And Gold

The oil-to-gold ratio chart above shows that relationship. from 2013 almost until the end of 2014 it was very stable between a ratio of 0.070 and 0.084. But then when oil started to implode the last half of 2014 the ratio fell with it. All the way to a low 0.030 in January 2015. Where oil was cut in half the oil to gold ratio took an even bigger hit.

Fast forward to today and the ratio has bounced substantially. In fact it has retraced 38.2% of the move down. This is an important retracement in the ratio. It is often a level where a bounce will fail. So a move through this level will be a sign of strength. And the momentum indicators support that happening. The RSI is rising through the mid line while the MACD is rising too.

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In simple terms this can mean that Oil continues higher or Gold continues lower or both happen. In a more complex world the ratio can continue just by both moving in the same direction (up or down) but with one moving faster than the other. What cannot happen for the ratio to continue higher is that Oil falls and Gold rises. Seems a pretty simple trade to make when 4 of 6 outcomes go with the current movement.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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I also remember there was a well documented visit by CNBC's Bob Pisani to GLD's gold vault. This visit was organized by GLD's management to prove the existence of GLD's gold but the gold bar held up by Mr. Pisani had the serial number ZJ6752 which did not appear on the most recent bar list at that time. It was later discovered that this "GLD" bar was actually owned by ETF Securities.
Greg, I see you've been following GLD for a while now. I've been doing my due diligence on this fund but have been encountering some difficulty searching for any details on the state of its insurance. Would you happen to know any specifics regarding GLD's insurance? This statement seems to be very relevant:. . "Did anyone try calling the GLD hotline in search of numerical details on GLD's insurance? The prospectus vaguely states "The Custodian maintains insurance with regard to its business on such terms and conditions as it considers appropriate which does not cover the full amount of gold held in custody." When I specifically asked for clarification on this clause and about how much of the gold was insured, the representative proceeded act as if he didn't know and said they were just the "marketing agent" for GLD. What kind of marketing agent doesn't know such basic information about a product they are marketing? It seems like they are deliberately hiding information from investors."
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