Gold-Oil Ratio Hits Multi-Year High
By Jon A. Nones
16 Jan 2007 at 07:39 PM EST
resourceinvestor.com
St. LOUIS (ResourceInvestor.com) -- The gold to oil ratio hit a multi-year high today, surpassing 12 barrels per gold ounce after crude dropped below 52/bbl and gold fell below 625/oz. So far in 2007, crude has given up 15% while gold has lost 1.5%, following last year’s drop of 3.6% in crude and gold’s gain of 23%. Analysts see a trend forming.
Dennis Gartman, Editor of The Gartman Letter, said in a report today that the ratio has hit yet another new high for the past several years and “the trend is clearly in our favour.”
“We've been involved with this trade for several years, and we expect the ratio to move toward 15:1 and ultimately toward 20:1,” he said.
Gartman noted that his preferred method of “owning” the trade is to be short crude oil and long gold.
“We've gotten lucky with this one ... very, very lucky!” Garman said.
Many investors buy gold when energy expenses climb in fear that inflation will follow, eroding the value of the dollar. However, recent trends indicate that the inverse relationship is not as closely correlated.
The 36-year average is about 17.5 bbl/oz, with last year coming in at 9.22 bbl/oz. However, the average for 2006 after July was closer to 10 bbl/oz, rising steadily from 8.5 bbl/oz in July, 10 bbl/oz in early October, 10.75 bbl/oz in early November and 11.30 bbl/oz in mid-November (11.25 bbl/oz earlier this month).
Today, with gold closing down $1.00 at $625.90 and crude falling $1.78 to $51.21, the ratio is trading at 12.2 bbl/oz - the highest level since April 2004, according to RI stats.
Crude Price Outlook
Crude-oil futures tumbled nearly 3.5% today after Saudi Arabia's oil minister said OPEC had no intention to cut production further to prop up prices.
Saudi Oil Minister Ali al-Naimi told reporters at an oil conference in India that the market is “significantly healthier” now than it was in October when OPEC agreed to cut output by 1.2 million barrels a day, and the current cuts are “working well.”
This compounded pressure on oil prices already put in place after OPEC President Edmund Daukoru said earlier cartel members should wait until February before deciding on additional reductions.
OPEC agreed to a second output cut of 500,000 barrels per day last month but deferred it until February. However, data suggest that individual OPEC members have been lax in implementing the agreed-on cuts.
Gary Dorsch, Editor of Global Money Trends, believes the culprits to be Venezuela and Iran.
In a recent article entitled, “What’s Behind the Crash in Crude Oil?” Dorsch said that Tehran left its oil output unchanged at 3.83 million barrels per day (bpd) last month after pledging to cut its oil output by 176,000 bpd, while Caracas actually increased its oil output by 20,000 bpd after pledging to reduce output by 138,000 bpd.
Coincidentally, the presidents of these two countries are both calling for a coordinated effort by OPEC to reduce the amount of oil on the market.
In more bearish news today, the American Petroleum Institute (API) reported that U.S. oil and natural-gas drilling estimates show that activity remains “robust with nearly twice the level of activity recorded during the lows of the early- to mid-1990s.”
According to API, an estimated 49,375 oil wells, natural-gas well and dry holes were completed in 2006, with the estimated 12,439 completions in the fourth quarter - the highest since the first quarter of 1986.
In fact, the only news supporting oil in the nearer term concerns colder temperatures in U.S. as ice storms move closer to the Northeast of the country - the world's largest heating oil consumer.
However, Peter Grandich of the Grandich Letter said in his latest update that “the bulk of the retreat is behind us.”
“I think we should start to plan on how to play the long side again,” he said, adding that “it’s more likely at the moment we hold $50 and even see a few dollars added to the upside.”
Setting $75 as the top, Grandich said investors have “a lot of lead way towards our next move.”
Gold Price Outlook
Gold showed strength in the morning, hitting a high of $629, but ultimately retreated as the U.S. dollar posted slight gains after the release of weaker-than-expected survey results on manufacturing in the New York region.
The Federal Reserve Bank of New York's general economic index fell to 9.1 in January - the lowest level since the summer of 2005 - from 22.2 in December (a number greater than zero signals expansion). The index measuring the manufacturing outlook for six months from now fell to 32.5 from 41.9.
Late in New York, the euro stood at $1.2915, down from $1.2950 on Monday. The dollar was quoted at 120.63 yen, up from 120.43 yen on Monday, after earlier hitting 120.76 - the highest level since December 12, 2005.
James Moore, analyst for TheBullionDesk.com, said in an e-mailed note that gold’s initial gains were capped and swiftly reversed by falling oil prices.
“Indeed it seems gold has regained its correlation with oil following Friday’s rally,” he said, adding that crude “could be facing a test of $50/barrel, or lower, in the coming days.”
Moore said gold is looking vulnerable in the near term after failing to clear the September trend-line of $629 and may find fresh selling if it trades below the 200-day moving average of $622.39.
In the latest edition of the Gold Monitor, Martin Murenbeeld, Chief Economist of Dundee Group of Companies, said the near term is “a tough call at the moment,” setting a neutral price of $625.
However, he reiterated that his medium and long-term outlook is quite bullish. In the December 21 edition of the Gold Monitor, Murenbeeld forecast a probability-weighted average of $674.5 for 2007.
“We persist with the view that the dollar will break downward over the course of 2007 however,” he added.
Grandich said he remains confident that gold will climb to last year's highs of $735 and possibly an all-time high of $875 “if certain conditions worsen.”
He said the “next $100 in gold is up,” and there are three factors that will propel gold higher (in order of importance): geopolitical concerns, the U.S. dollar and supply versus demand.
“At the end of the day, gold is not an asset class as so many touted during the commodities craze in 2006, but it’s an alternative to paper money, especially the world’s ‘current’ reserve currency, the U.S. dollar,” he said.
Other Metal Activity
Most of the other Nymex-traded metals were lower today as well.
March silver finished down 25.5 cents, or 2%, at $12.62/oz; April platinum fell $6.30 to $1,145.80/oz; March copper futures lost 2.55 cents to end at $2.5775/lb.
March palladium was the lone winner today, up 90 cents at $335.85/oz. |
