More on the relationship between gold and oil (the “Gold-Oil ratio”).

15 June 2020

Further to reading up on statistical research concerning the long-term equilibrium relationship between gold and oil (the research for the most part used cointegration analysis to arrive at their conclusions), the following points lend support to my proposition that the gold-ratio will revert to its 20-year average (see chart below):

1.  The long-term relationship between gold and oil typically goes “nuts” during times of crisis (the chart below shows three spikes, all major crises times – 1998/2000, 2008/2009, 2020 so far);

2.  Cointegration is present in gold and oil and that this cointegration is “dynamic” in nature.  That is, during good times the relationship is strong and during crises it is weak.  Market turbulence merely weakens the relationship (as illustrated in the chart below with the spike in the gold-oil ratio in 2020) – it does not destroy or remove it;

3.  And finally, the research suggests that the movement in silver prices leads that of oil prices, while oil price movement leads the movement in gold (see further below the year to date 2020 charts for silver, gold and oil). It appears that oil is lagging behind both silver and gold in price action so far in 2020 – at least when seen in terms of being close to the highs year-to-date.  i continue to see an opportunity for oil to (a) close the gap between 39 and 45, and (b) head back in to over 65 dollars before the year is out (see (c) on the right side of UPCOMING POSTS).