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.
METALS #5 - ENERGY #11
(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.