The Curious Case of Gold and Oil
by: Hard Assets Investor May 18, 2010

Lately, the conversations ‘round the pasta table at neighborhood potlucks have been veering toward personal finance and investments. Most recently, the chatter's been peppered with questions about the decoupling of gold and oil prices. Ms. Tortellini Salad asks:

Aren't gold and oil measures of inflation? Then why is gold up and oil down?

Good question (and good salad).

Generally speaking — and that'd be very generally indeed — gold and oil do move in tandem. But wrinkles in the relationship develop because of differing fundamentals and because of fears. We're living in a fear-driven market now and that's where gold really, um, shines.

As the Greek debt crisis unfolded and fear of Continental contagion spread, capital streamed to safe-haven investments like the greenback and gold. Meanwhile, the prospect of a further meltdown in aggregate demand tilted an already-glutted oil market — for WTI crude, at least -downward.

Put simply, oil got cheap, not only in dollars, but also in terms of gold. Recently, an ounce of gold could buy as few as six barrels of crude to as much as 25 barrels.

Gold/Oil Ratio

The ratio's most recent high followed six months of frantic de-leveraging and was itself followed by basing at the 14x-15x level as economic fixes were instituted and fears eased.

Take a look at the chart, though. We've had a vertical ascent in the ratio this month. We're pushing on the 18x level now.

The question for traders — and for those lingering around pasta tables — is whether this is a repeat of the late-year 2008 move or just a short-term blip.

The potluck consensus — a thoroughly unscientific and calorie-influenced poll — seems to line up with the blip notion. For now, at least. There are a lot more potlucks on the calendar over the summer months, so we'll keep you posted if there's any change in the backyard mindset.

About the author: Brad Zigler
Hardassetsinvestor.com (http://hardassetsinvestor.com/) is a Van Eck Associates-sponsored, research oriented Web site devoted to sharing ideas about hard assets investing. The site has been developed as an educational resource for both individual and institutional investors interested in learning more about commodity equities, commodity futures and gold (the three major components of the hard assets marketplace). The site focuses on hard assets investing, without endorsing or recommending any particular investment product or approach.

Join Us