There’s a strong correlation between the price of gold and the price of oil. The average ratio is somewhere around 15.4 — an ounce of gold can buy 15.4 barrels of oil, going by historical prices. This isn’t always true, of course — but it’s the average ratio.
One of the keys of investing is to know what to expect to happen “next”. If you’re well-versed in how different events are strongly correlated, you’ll be able to see a move in the oil market and know what to expect, at least one some level, in the gold market.
Is This How to Predict Gold Prices?
The traditional view of the oil-gold ratio is that because the traditional ratio is 15.4, it can be used as a standard for determining which way gold or oil will move over time.
For example, if gold drops to $200 per ounce, and oil is at $100 per barrel, then one would conclude that either gold is going to go up or oil is going to go down.
The traditional view for those who looking to the gold-oil prices ratio to make predictions about the price of oil should obviously be taken with a grain of salt. As I’ve written before, gold price predictions are usually wrong.
Still, it can be incredibly useful to watch the ratios to see if they help us affirm other predictions we might be making about gold and/or oil prices. Here are the traditional buy/sell signals:
- Buying Signal: When the gold-oil ratio hits at/below 10 barrels of crude oil per ounce of gold.
- Selling Signal: When the gold-oil ratio turns down at/above 20 barrels of crude oil per ounce of gold.
I can’t stress enough how much this isn’t an exact science. It’s just a potential sign of what’s going to happen next — and it should be used as the only indicator to make substantial short-term trades. That’s a good way to lose one’s shirt.
Once Again: The Case for the Permaskeptic
As I’ve argued in the past, I’m a permaskeptic, meaning I’m rarely completely convinced of any direction the market is heading. I’m not saying I’m a nihilist or anything silly — just that I try to stay skeptical. I make big bets, but only after the evidence seems to be overwhelming to me that my choice is a strong one.
I’ll be writing more about why more people should be permaskeptics in future articles — make sure to subscribe to get the guides delivered to your email free of charge.
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