Wednesday, May 21, 2008

Gold vs. Oil

Peak Oil or not, crude has had an incredible run as of late. If you have any doubt about how sharp the move has been, check out Tim Knight’s Elliott wave count and chart at The Slope of Hope.

As the chart below shows, gold has had quite a run too (see the area chart), but lately oil has been outperforming gold. One way to interpret this ratio chart is to think of what an ounce of gold would cost if it were priced in barrels of oil. As anyone who has been to Dubai lately can tell you, it is taking less and less oil to buy an equivalent amount of gold these days.

There was a time when a house was considered to be one of the best hedges against inflation. Clearly that is not the case at the moment – at least in the US. Gold has historically been an even better inflationary hedge, but lately oil has outpaced gold in that area. The oil trade is very crowded at the moment and when oil turns down, there will still be many who are seeking alternative hedges against inflation. Don’t be surprised if a lot of that oil money flows into gold and sends the gold to oil ratio back toward historical norms.

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