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Ratio Still Points to Higher Oil Prices

Ratio Still Points to Higher Oil Prices

Gold/oil metric headed back to a “normal” range

I’m packing my bags for a long-awaited summer sojourn and can’t help but think ahead of the likely market gyrations while I’m on the road (and up in the sky and bobbing on the seas). On holiday, I won’t be completely unconnected from the markets but I’ll certainly be a few steps more removed than usual (well, measured by the distance between the veranda and the bar, anyway).


There’s one—make that two—markets I’ll be following from the Lido Deck: oil and gold. I started to say one market because we wrote about the gold/oil ratio a month ago. That’s one market, right?

In our April 25 column, Which to Buy: Oil or Gold?, we posited the precipitous decline in the gold/oil ratio as a trend. Traders were signaling more interest in pushing up oil prices than gold tariffs. Back then, the ratio was 29-to-1 (meaning one ounce of gold could buy 29 barrels of oil). Historically, the ratio trades in a range between 10-to-1 and 20-to-1. Speculative peaks in the ratio (that is, when gold grossly outpaces oil) are usually followed by a strong resurgence in crude prices.

Further confirmation of oil’s bullishness was telegraphed by a technical signal on May 10 when we published Bull Market In Oil Ahead?

And now? Where’s oil now? In the month since the gold/oil ratio column ran, spot oil’s climbed 16 percent. Gold, meantime, has given up 1 percent. And that ratio? It’s now 25-to-1. You get a lot less oil for your bullion today.

So what’s all this mean for investors? Well, we mentioned the United States 12-Month Oil ETF (NYSE Arca: USL) in the April 25 column. Since then, USL’s gained 11 percent (you don’t get as much bang out of a bull move in an oil ETF because of contango, but that’s a story for another day).

Technically, USL looks very bullish on the short-, intermediate- and long-term charts. There’s some overhead resistance at $19.71 (the ETF last traded at $19.35 as I write this), but once that’s cleared, there’s a pathway to the $21 level. And beyond that? $23. All told, that would be a 30 percent gain from the April 25 level. There still seems to be some upside for oil this summer.

And gold? Well, proxied by the SPDR Gold Shares Trust (NYSE Arca: GLD), things don’t look good on the near-term chart. Things are neutral in the mid-term, though still bullish going out further. With that kind of an outlook, I wouldn’t be a buyer. Not yet.

Instead, for us contemplating our time on the Lido Deck, it’ll be “buy (oil) in May and go away.”

Brad Zigler is REP./WealthManagement's Alternative Investments Editor. Previously, he was the head of Marketing, Research and Education for the Pacific Exchange's (now NYSE Arca) option market and the iShares complex of exchange traded funds.

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