OIL TO GOLD RATIO IT FORETELLS AN INTERESTING STORY

February 13, 2007

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

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

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

When the oil to Gold ratio drops below 9 then it pays to get out of oil and buy Gold. When this ratio trades above 11 the opposite is true; it’s good to jump out of gold and buy oil.

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

In 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 then oil.However now we are at another new extreme inflection point. The current ratio stands at 12.5 and thus it more then makes sense to go long Oil and get out of Gold. What this pattern is basically illustrating is that Oil is now a better investment then Gold. 

The second chart which is a 3 year chart of oil clearly illustrates the long term up trend line has been violated. However note that there are now two zones of extreme support in the 40.50 and 45 ranges and its 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 extremely slim and it will most likely only test its current lows. 

This is a 10 year chart of oil and one can clearly see that the main up trend line is still fully intact; in fact we could trade all the way down to the 41.40-42.00 ranges without violating it.  Note to that each bar here is a monthly bar so that means 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.

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

Now lets bring in other factors such as thegeopolitical situation, terrorism etc.

One of the main reasons behind the fast pull back 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 they like all governments they lie through their teeth.  Saudi Arabia is terrified of a stronger Iran; as it stands Iran is already significantly stronger then Saudi Arabia from a militarily stand point of view. They were successful with this strategy in the past and were able to keep Iran in check every time they got arrogant by hitting them hard in their pockets. The strategy has worked so far but only on the short term time frames. The following factors will ensue that these effects are temporarily and short lived at most;

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

2)   Russia is the other big factor. As we stated so many times in the past they clearly 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 give a dam about 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 are ensuing that oil does not fall below a certain level. Similar ploys will be used if necessary to control the plunge in natural gas prices. Basically Russia has decided that its time to use its energy resources as a bargaining chip and there is really nothing the West can do to prevent it from doing so as Russia is armed to the teeth with extremely advanced weaponry. 

3)   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 Saudi’s flooded the markets with oil the effects were usually terrible. However this is no longer the case and so at most the Saudi’s are simply going to provide the astute investor with a lovely opportunity to load up on extra shares of energy stocks at incredibly low prices. In fact 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 the next time round certain small cap stocks will experience rather huge explosive gains. 

Conclusion

We are not advocating that Gold is not a good investment; we are simply stating that the ratio above quite clearly illustrates which of the two will provide a better rate of return on capital in the short to intermediate time frames. Long term everyone should have a certain portion of their money in either Gold bullion or Silver bullion.  Indeed since we made this info available to our subscribers (Jan 30, 2007) oil has moved up significantly.  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 gained risen 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. In fact many of these small cap stocks actually foresaw the coming correction in oil.  One must remember that oil after is also known as the Black Gold. Thus it makes sense to own some of this Gold and the best way to do this is via certain stocks.

People of humour are always in some degree people of genius

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