St. LOUIS () -- The gold to oil ratio has been falling in 2007 with oil prices increasing at a faster rate than gold. The ratio now sits around 8.45 barrels to gold ounce, the lowest all year. With gold hitting 28-year highs and oil at all-time highs, the question now becomes: Is oil too high or is gold not high enough?
Ross Norman, Director of TheBullionDesk.com, told RI today that oil is well priced, and it "feels like gold is lagging."
"Which one's out, we think it is gold," he said.
Spot gold prices in New York closed up $16.50 at $783.50 bid on Friday while oil prices gained $1.40 to end at $91.86 a barrel.
Oil prices have gained about 14% in one month, 22% in three months, 41% in six months and 51% so far this year, while gold has gained only 5%, 14.5%, 13% and 22%, respectively.
Last year, the gold to oil ratio averaged about 9.2 bbl/oz, falling below 8 in June 2006. At that time, gold was trading in the $570s, while crude was rallying above $70.
The ratio could not sustain levels above 10, however, until gold breached $630 and oil fell below $60 in November.
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This year, the ratio has averaged about 10.05 bbl/oz, hitting a multi-year high of 12.53 bbl/oz on , and lows of 9.20 bbl/oz in .
With the 36-year average near 17 bbl/oz, followers of this correlation see gold moving much higher.
Norman said at a ratio of just 14 to 1, gold would be $1400 an ounce.
But the ratio is more of a long-term gauge and not on a month to month, year to year trend, he said. Near-term price direction is difficult to predict trading the ratio.
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Dennis Gartman, editor of the Gartman Letter and a long-time trader of this correlation, recently gave up on the trade. He had once said he wouldn't be happy until it returned to 11 bbl/oz, and the ratio hasn't hit that level since March.
Gartman moved from seven long units of gold and seven short units of oil in the spring/summer to four long units of gold and four short units of crude in the fall. He sold the four remaining crude units in September, but energy prices have since skyrocketed.
"Energy prices have flown skyward as a 'perfect storm' of various effects have all come together at one time, and in a very compact period of time, that have combined to push nearby WTI toward $92/barrel," he said in today's Letter.
Crude prices have rallied of late on the back of worries over inventories and growing U.S. tensions with Iran. The gains were also driven by worries about potential conflict between Turkey and the Kurds in the north of Iraq, as well as continuous violence in Nigeria.
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In Nigeria, gunmen in speedboats attacked the FPSO Mystras oil vessel off the coast and kidnapped six workers. The Mystras is capable of producing 80,000 barrels of oil per day.
Militants have kidnapped about 100 foreign workers this year in the Niger Delta to press their demands for local control of oil revenues.
Separately, Turkey has gathered troops along the border of Iraq, while the Turkish military has been pounding suspected bases of Kurdish rebels. Iraqi and Turkish officials are talking in Ankara in an attempt to avoid a ground incursion by Turkish troops, but the matter still remains largely unsettled.
"Most observers have little doubt that crude oil supplies would encounter some form of disruption, were some direct conflict in the region to, in fact, take the place of the present, loud, sabre-rattling," said Jon Nadler, analyst at Kitco.com.
On Thursday, Washington imposed new sanctions on Iran, accusing the Islamic Revolution Guards Corps with supporting terrorists in Iraq and Afghanistan and the proliferation of weapons of mass destruction. The sanctions freeze the Iranian military's U.S. assets and bar Americans from doing business with its leaders.
On Wednesday, the Energy Department reported that crude supplies dropped by a much higher-than-expected 5.3 million barrels in the latest week. OPEC Secretary General Abdalla el-Badri said Thursday that the cartel will not increase oil output beyond the 500,000 barrels a day due to come into the market in November.
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Gold's near-term price direction has been driven largely by commodity funds and investors aggressively added positions amidst the crude oil rally and a falling dollar. The metal has surged more than $100 since the beginning of September.
"The backdrop of a feeble dollar and the assumption that the Fed will cut rates once again next week contributed to the boldness among gold bulls," said Nadler.
The dollar fell to record lows against the euro and a basket of currencies on Friday as investors anticipated a Federal Reserve interest rate cut next week. The euro rose as high as $1.4375, and recently was trading up 0.3% at $1.4368. The dollar index fell 0.3% at 77.055.
Nadler said the gold market participants are also focusing on the set of harsh U.S. sanctions levied against Iran yesterday, and Tehran's sharply defiant response to the imposition.
"When it comes to warfare - possible or actual - the price premia that gold is capable of bearing can be counted on quite reliably," added Nadler.
But he believes that the rally remains a speculative and largely fund-driven bet, exhibiting massively overbought conditions, record open interest and large net speculative long positions.
Norman, however, said there are "an awful lot of good buyers out there" in the market, maintaining his forecast that gold will hit $850/oz this year. "It's the quality buying and not the quantity. It's not hot money," he said.
Dr. Martin Murenbeeld, chief economist of the Dundee Group of Companies, said in Friday's edition of "Gold Monitor" that his previous forecast of a Q4-average gold price in the mid $700s "is very apropos."
"The dollar is coming down, oil prices are pushing $90, and U.S. interest rates have been cut - and will be cut more in the coming weeks/months," said Murenbeeld.
He said the Fed should cut interest rates on Wednesday, and on Friday the U.S. will report on October employment, "which could also cause some market turbulence."
"The fundamentals favour gold, and as best as we can see they will continue to favour gold for years to come," said Murenbeeld.
