Buying Oil Investments – Chapter 10: Investments in Gold versus Oil

This is chapter number 10 out of 12. Read the rest:

Read Buying Oil Investments – Chapter 1: Introduction
Read Buying Oil Investments – Chapter 2: Getting started in oil investments
Read Buying Oil Investments – Chapter 3: Factors which affect the price of oil
Read Buying Oil Investments – Chapter 4: The determinants of Oil Prices
Read Buying Oil Investments – Chapter 5: Trading in Oil Futures: (The impetus of the market sentiment)
Read Buying Oil Investments – Chapter 6: Investment Options
Read Buying Oil Investments – Chapter 7: Exchange Traded Funds
Read Buying Oil Investments – Chapter 8: The Risks Of Investing In The Oil & Gas Industry
Read Buying Oil Investments – Chapter 9: Advantages Of Investment In The Oil & Gas Industry

During the last three years, commodities prices have been on the upswing. This upward trend is led by increased demand in oil and gold. The oil price began the uptrend initially ahead of gold price during the mid 2008 but now the price rally is being led by gold. Currently, this situation has given analysts cause for worry. 

This is because analysts look to the ratio of gold prices in relation to oil prices as an indication of the health of the economy. If gold prices begin to outperform oil prices, the ratio will increase. An increase of this ratio will indicate that a recession in underway. The converse will indicate a strong economy and possible inflationary pressures. According to a strategist at brokerage firm CMC Markets, this ratio had a monthly average of 13 for the last 37 years. This means that the price of gold is 13 times more than oil.

This ratio dropped to 5.8 in July 2008 when oil prices rose to a peak of nearly $150 per barrel. Since then, the ratio rebounded to 10.44 when oil prices began declining while gold prices rose to $912.30 per troy ounce. This was followed by a recession, interest rate cuts by the Federal Reserve and the decline in the value of the dollar.

Oil prices dropped like a stone then, due to the profit taking moves by the hedge funds and others investors in the Futures market. This indicates that there is a direct correlation between this ratio and the performance of the overall economy. Thus if the price of gold continues to outperform oil prices, the economy might be in for more downturns.

Read Buying Oil Investments – Chapter 11: Peak Oil
Read Buying Oil Investments – Chapter 12: Conclusion