----- 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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