Market analyst Regina Meani discusses the gold price and gold to oil ratio.
In July 2020 we looked at the long-term trends for the Gold/Silver ratio which was useful in identify that there was still time for a swap out of gold into Silver. We thought that it was time to turn to ratio analysis again but this time with the Gold to Oil ratio because, at current levels, the price for gold seems stuck and the price for oil continues to push higher. The ratio is calculated by the number of barrels of West Texas International oil it takes to buy an ounce of gold and originated when oil was largely used to purchase gold.
It has become a global barometer for the health of the world economy and an overbought/oversold indicator for gold. In other words, it helps determine buying and selling opportunities for gold from the long-term perspective. On the accompanying chart lines are drawn at the top of the scale between 20 and 30 to indicate overbought readings and then at the lower end between 8 and 12 for an oversold condition. (Note that generally the lower end is set between 8 and 10 but for our purposes a higher leeway is preferable.)
As with most things during 2020, all the rules or known guidelines went out the window with the gold to oil ratio exploding and tripling its usual range but as we look at the current levels for the ratio, which is around 24, perhaps the world is starting to take back control. While we will keep the old parameters on the chart there appear to be new guidelines emerging. If that is the case then the price for gold has returned from the excessive levels experienced from March last year but this does not necessarily mean that it is an opportune time to buy gold but that the trend is heading in the right direction for opportunities to appear.
Our last review of the gold price (now at US$1749.7) occurred in April this year and at the time we warned that the price needed to break through barriers at US$1800 and then $1850 to clear the way towards the next barrier zone in the $1900- 2000 area. The price rallied strongly through April and May to halt around $1900 in June, failing to push through the $2000 level. The subsequent downturn has been volatile with a price plunge under $1700 and quick recovery in early August only to be buffered again in the $1800-1850 zone in September.
The price has continued to sell-off and the short-term indications remain negative with some divergence highlighting the uncertainty going forward. The long-term upward path remains strong but could be threatened if the price penetrates the $1670 support. For a resumption of the upward path the price would need to once again overcome the $1800 level and then $1900. Over the short-term we believe that these parameters are likely to remain and provide trading opportunities.
In our next report we will focus on the other half of the ratio, the oil price which is approaching a critical juncture in its upward path in the US75-80 range.