----- Original Message -----
Sent: Thursday, April 27, 2006 10:38 AM
Subject: Incredible Charts - What's New
April 27, 2006
This newsletter is for educational purposes
only and subject to Incredible Charts Terms of
Use.
The Gold-Oil
Ratio
Gold and crude oil prices tend to rise and fall in sympathy with one
another. There are two reasons for this:
- Historically, oil purchases were
paid for in gold. Even today, a sizable percentage of oil revenue ends up
invested in gold. As oil prices rise, much of the increased revenue is
invested as it is surplus to current needs -- and much of this surplus is
invested in gold or other hard assets.
- Rising oil prices place upward
pressure on inflation. This enhances the appeal of gold because it acts as
an inflation hedge.
Gold Price History
The chart below starts with the
Yom Kippur war between Israel and its neighbors in 1973 -- and the resulting
Arab oil embargo when crude oil rocketed from $3 to $12/barrel. This was
followed by the 1978 revolution in Iran and the Iran-Iraq war in 1980 which
lasted until 1988. Iraq then invaded Kuwait in 1990, but the ensuing Gulf War
had a limited effect on gold prices.
Gold went into a decline until
awakened from its slumber on September 11, 2001. The invasion of Iraq followed
in 2003, initiating a strong up-trend, and prices have lately spurred even
higher as tensions escalate over Iran's nuclear
program.
Oil Price History
Yom Kippur started a huge spike
in oil prices with the Arab oil embargo in 1973. This was followed by another
spike in 1978 at the time of the Iranian revolution, culminating with the
subsequent invasion by Iraq and the start of the Iraq-Iran war. The Saudis
substantially increased production in 1985 and the Iraq-Iran ceasefire further
eased shortages in 1988. The invasion of Kuwait and ensuing Gulf war caused a
brief spike in 1990, but a relatively stable period then followed -- until
1998 when OPEC increased production while demand was falling due to the Asian
financial crisis, causing a slump in prices. Subsequent production cuts saw
price recover, before September 11 and the 2003 invasion of Iraq heightened
fears of further shortages.
Readers need to bear in mind that
the above prices are not adjusted for inflation. In today's dollars, oil
traded at close to $100/barrel and gold above $2000 during the 1980
crisis.
The Gold-Oil Ratio
The easiest way to eliminate
inflation from the above charts is to express price as a ratio: How many
barrels of oil you can buy with an ounce of gold.
Gold-Oil Ratio =
Price of Gold (per oz.) / Price of Crude Oil (per barrel)
The gold-oil ratio helps us to identify overbought and oversold
opportunities for gold. The chart below shows solid support between 8 and 10
barrels/ounce of gold over the last 30 years, with occasional spikes carrying
above 20 but seldom holding for any length of time.
Signals
The gold-oil ratio identifies:
- Buying opportunities
when the gold-oil ratio turns up
at/below 10 barrels/ounce.
- Selling
opportunities when the
gold-oil ratio turns down at/above 20 barrels/ounce.
You don't have to be a
fantastic hero.
You can be just an ordinary chap, sufficiently motivated to
reach challenging goals.
~ Edmund Hillary
Regards,
Colin Twiggs
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