Capitalizing on the Oil to Gold Ratio: An Ideal Time to Invest in Oil

Unveiling the Narrative: The Intriguing Tale Foretold by the Oil to Gold Ratio

A moment’s insight is sometimes worth a life’s experience

Oliver Wendell Holmes 1809-1894, American Author, Wit, and Poet

The first chart illustrates how many barrels of oil it takes to buy an ounce of Gold. When one looks at this chart, one notices a rather interesting relationship that can be summarised as follows.

When the oil to Gold ratio drops below 9, it pays to get out of oil and buy Gold. The opposite is true when this ratio trades above 11; jumping out of gold and purchase oil is good.

On Dec 05, this ratio traded in the 11 ranges, and as such, it made sense to jump into the oil and get out of Gold. As it turned out, oil was a better investment in this period than playing the Gold sector.

On Oct 06, the ratio traded to an extreme point and fell below 7; thus, the moment was ripe to go long gold and sell oil. Since then, Gold has held up much better than oil. However, now we are at another new extreme inflexion point. The current ratio stands at 12.5; thus, going long Oil and getting out of Gold makes sense. This pattern illustrates that Oil is now a better investment than Gold.

Chart Insights: Analyzing Oil’s Long-Term Trend and Support Zones

The second chart, which is a 3-year chart of oil, clearly illustrates the long-term up-trend line that has been violated. However, note that there are now two zones of extreme support in the 40.50 and 45 ranges, and it’s possible (30% chance currently) that oil could trade to the 45 ranges once more before resuming its upward trend. If it should trade to 60 dollars over the next few weeks, then the chances of it putting a new low are incredibly slim, and it will most likely only test its current lows.

This is a 10-year oil chart, and one can see that the main up-trend line is still fully intact; in fact, we could trade down to the 41.40-42.00 ranges without violating it. Note that each bar here is a monthly bar, so we could technically trade below 40, but as long as oil closes above 40 by the end of the month, the main up-trend line will remain in force.

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Maximizing Returns: Leveraging the Oil to Gold Ratio in Investment Opportunities

Based on technical analysis and mass psychology, it now makes sense to start taking different positions in this sector. Too many pundits out there are beginning to predict even lower prices. Not so long ago, they were all busy screaming that oil would be trading past 100 dollars; how fast these pesky little buggers change their tunes.

Now let us bring in other factors, such as the geopolitical situation, terrorism etc.

One of the main reasons behind the fast pullback in oil prices is that Saudi Arabia has flooded the market with oil at the behest of the United States. Yes, we know officially they have stated that they are cutting back oil production but remember, like all governments, they lie through their teeth. Saudi Arabia is terrified of a more assertive Iran; as it stands, Iran is already significantly more potent than Saudi Arabia from a military standpoint of view. They were successful with this strategy in the past and could keep Iran in check every time they got arrogant by walloping them in their pockets. The strategy has worked so far, but only in the short term. The following factors will ensure that these effects are temporary and short-lived at most;

Supply Shock: Troubles in Nigeria and Alaska Impact Global Oil Markets

A significant amount of oil production has been knocked off the markets in Nigeria due to the highly volatile situation (Terrorism, sabotage etc.). Alaska has also lost significant production due to the problems with BP’s pipeline. These factors are responsible for almost taking one million barrels a day from the market.

Energy Chess: Russia’s Calculated Moves to Solidify Control and Influence

Russia is the other big factor. As we stated so many times, they see a window of opportunity to knock the US from its throne and are wasting no time in taking advantage of this factor. Russia simply does not care what the rest of the Western world thinks of it. It’s busy aligning itself with the new rising powers (China and India) and consolidating the entire energy sector in Russia.

They are using the ploy that they have a problem with Belarus to cut off oil supplies to the markets and thus ensure that oil does not fall below a certain level. If necessary, similar ploys will be used to control the plunge in natural gas prices. Russia has decided that its time to use its energy resources as a bargaining chip. There is nothing the West can do to prevent it from doing so, as Russia is armed to the teeth with highly advanced weaponry.

Shifting Dynamics: China and India’s Rise as Energy-Hungry Players

The final factor is the emergence of China and India as two new energy-hungry consumers. In the past, they were not a big factor, so when the Saudis flooded the markets with oil, the effects were usually terrible. However, this is no longer the case.

So at most, the Saudis will provide the astute investor with a lovely opportunity to load up on extra shares of energy stocks at low prices. Most of the small-cap stocks in this sector have already priced in 40-dollar oil and are now looking into the future. Another interesting fact is that most of them hardly rallied when oil was putting in new highs on a weekly basis. This suggests that certain small-cap stocks will experience rather huge explosive gains the next time.

Concluding the Oil to Gold Ratio Journey

We are not advocating that Gold is not a good investment; we state that the above ratio clearly illustrates which of the two will provide a better return on capital in short to intermediate time frames. Long term, everyone should have a particular portion of their money in either Gold bullion or Silver bullion.

Indeed, oil has increased significantly since we made this info available to our subscribers (Jan 30, 2007). Oil has roughly risen 18% since then, from a low of 51 to a high of 60.00. In the same time frame, Gold has increased by 10%; this is by no means a shabby gain.

We believe that certain small-cap stocks in the oil sector will explode to the upside significantly on the next leg up, as many of these hardly moved the last time oil rallied. Many of these small-cap stocks foresaw the coming oil correction. One must remember that oil after is also known as the Black Gold. Thus, it makes sense to own some of this Gold; the best way to do this is via certain stocks.

People of humour are always to some degree, people of genius

Samuel Taylor Coleridge 1772-1834, British Poet, Critic, and Philosopher