All markets are intertwined somehow with the regards to fundamental aspects.  There are some markets that act parallel to metals prices and some that have an inverse relationship.  Crude Oil is one market that has acted as a sister to the precious metals markets.  Back in 2002-2008 when Crude oil rose Gold was surely quick to follow.

Through most of the last 5 years the prices of Gold and Oil have steadily climbed together with one another.  Crude oil rose from $30 a barrel to $60 a barrel from 2003-2007 and Gold doubled as well moving up from $350 an ounce in 2003 to over $700 on ounce in 2007.  Oil started to outpace Gold in the middle of 2008 with the sharp run-up to $147 a barrel but the roles have quickly reversed.   We have seen a major sharp selloff in Crude for 8 straight months now falling all the way to $40 a barrel as hedge funds liquidate their long positions.

One ratio that analysts closely pay attention to is the ratio of gold prices to oil prices to determine where the economy might be headed.  This ratio is often steady during glorious economic times.  When Oil rises this ratio gets lower signaling strong growth for the economy but also hinting to inflationary times ahead.   Over the last 37 years this ratio has a monthly average of 13 (Gold’s price divided by Oil’s price) (1).  The Gold to Oil ratio bottomed out in July ‘08 at 5.8, possibly signaling the start of a recession.

PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS.

Here is a perfect example to see the fast acceleration of this ratio as the price of Crude dumps in July and does not look back.   Gold on the other hand made a bit of a pullback in October of ‘08 only to rally to $1,000 by the end of February ‘09. You can see that the ratio bottomed out signaling a time of recession and has steadily climbed upwards.  Gold is now trading at an inverse to Crude Oil.  When the worldwide markets take a hit so does oil heading lower on weak demand and growth.  Gold however rallies hard on the market’s collapse as investors try and rush to the precious metal in times of uncertainty.  We need to start and see this ratio come back down from its high levels and have the correlated relationship it once owned if we want to get out of this deep recession in the markets.

Trading in futures and options involves a substantial degree of a risk of loss and is not suitable for all investors. Past performance is not indicative of future results.

(1)    http://blogs.wsj.com/marketbeat/2008/10/08/gold-vs-oil/