What is the Gold-to-Oil Ratio telling us this time?

Dear PGM Capital Blog readers,

In this weekend’s blog edition we want to elaborate on the Gold-to-Oil ratio which since the beginning of this year is in record territory.

The Gold-to-Oil ratio measures how many barrels of crude oil is needed to buy one (1) ounce of gold.

On average, the ratio has historically traded around 15, however, as can be seen from below chart, since November of last year the Gold-to-Oil ratio has been surging higher to reach an all time high of 39.15, in January of this year, which literally means that 39.15 barrels of Oil is needed to buy one Troy ounce of Gold.

50-year Gold-to-Oil Ratio

On Friday July 8, the Crude Oil price closed at US$ 45.21 a barrel and the Gold price at US$ settled at US$ 1365.91 an Ounce, which brings the Gold-to-Oil ratio to 30.88

As can be seen from below chart, world’s most important commodity, the blood of the earth, crude oil, has fallen more than 60% since June 2014.

Why are the Oil prices falling:
Commodity prices, like most others, are determined by two factors: supply and demand. The longer-term oil price sell-off has been led by a rise in supply, as US production has picked up with the advent of shale gas investment on a large scale.

On the other side, China, the world’s second largest economy, pivots away from energy-intensive industrial growth, towards a more consumption-led model of development.

On Friday, July 8, gold futures in New York for delivery in August, the most active contract, fell to a low of US$1,336.30 shortly after the non-farm payroll numbers data was released, but quickly shot back up US$ 5.41 or 0.43%, to close the trading day and week at 26 month high of at US$1,365.91 an ounce as can be seen from below 3-year chart.

Year-To-Date, Gold prices are up with more than US$ 300,00 an ounce or 28.64 percent making it one of the best performing asset this year.

Oil, as measured by an ounce of gold, is at its cheapest in decades and that worries some strategists given the ratio’s uncanny knack for predicting big financial crises.

Economists are still divided about whether or not cheaper oil is good for the economy. The bullish camp argues that lower prices at the pump are the equivalent of a tax cut.

The bearish camp on the other hand, will point out that such a dramatic decline in gasoline prices is an extremely deflationary force on an already vulnerable global economy.

Deflation is dangerous because it slows the supply of money and credit flowing through the economy, and reduces consumer demand in a self-reinforcing cycle.

As usual, the correct answer lies somewhere in the middle. While the impact on the broader economy is debatable, historically, extreme fluctuations in oil have wreaked havoc on financial markets.

Several metrics indicate we’re headed for major volatility.

History has proven, that the Gold-to-Oil ratio is actually very significant, because during the last 30-years it predicted all the previous crises, as can be seen from below chart.

Gold-To-Oil Crisis Chart


The main reason for this is, that oil prices tend to fall when economic growth is weak and investors are worried, while gold thrives in that environment, with the consequence that the gold-to-oil ratio spikes around periods of financial crisis.

Below chart proves the above, for which reason investors are asking themselves,

What crisis is the Gold to Oil ratio, predicting this Time?

The PGM Component 50 Index:
The PGM Component 50 Index, which is heavily weighted with precious metals and other wealth preservation’s securities, is up 37.15 percent YTD, and has closed on Friday, July 8th at fresh new all-time high of 1,231.95 points.

Screen Shot 2016-07-08 at 5.45.09 PM

Above chart shows also that the PGM Component 50 Index, has also beaten all major markets and Gold YTD .

We believe that a very serious global economic crisis, is on the horizon, for which reason during the last four years, via several interviews and blog articles we have been warning investors, for turbulent times ahead and that Gold and other precious metals are the only insurance against it.

We believe also that Friday July 8th, reaction on the gold market suggests another US rate hike – so long in the making – is now finally baked into the price of gold, and that traders are focusing on the backdrop of negative interest rates in many developed economies, worries global economic growth and geopolitical uncertainty surrounding Britain’s exit from the EU.

Last but not least, before following any investing advice, always consider your investment horizon, risk tolerance and financial situation and be aware that prices of precious metals and the stock of their producers might be very volatile and that sharp corrections may happen in the short term.

Until next week.

Yours sincerely,

Suriname Times foto

Eric Panneflek

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