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

24 February 2021

In my posts dated 9, 10 and 15 June 2020, I stated the proposition that the gold-oil ratio will revert to its 20-year average (see chart below).  Here is where we are as of this date:

1.  In my post of 9 June 2020 I stated that the ratio has gone from 52:1 in March to 43:1 in June.  I talked about the high degree of cointegration between gold and oil and that the long-term equilibrium point for the ratio is between 15 and 17:1, with a possible overshoot to 14:1.  I wrote that this implies a price of 120 dollars a barrel for Brent (I also added a timeframe of 2 years – mid-2022);

2.  In my post of 10 June 2020 I cited 4 studies that analysed the high degree of cointegration between gold and oil;

3.  Current Gold:Brent ratio = 27:1 (1800:66).  Gold may rise with oil but oil should outpace that in percent terms.

Assuming a gold price in mid-2022 of $2000 and a gold:oil ratio of 14:1, Brent has the potential to rise to $142.  I think I will stick to the 120 forecast as before.


MyDVICE Letter & Views - Metals and Energy Trading Oil Post 1

(The ratio is not done yet! There's more in the pocket)

Upcoming Posts (that were promised in June 2020 but I never got around to writing): 

(a) An options structure to profit from a move up in the price of Platinum.  Two strategies:  a play on the outright price and a play on the spread versus Gold.  (I still like platinum over gold and palladium.)

(b) Long term options structure to profit from a move to over 100 dollars in Brent by mid-2022. based on the mean-reversion of the gold-oil ratio.

20Y Data – Gold:Brent Ratio


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