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Page added on December 24, 2013

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A wonky look at some data: oil vs. gold, and gasoline on holidays

Business

A look at two data points and what they mean… if they mean anything.

We’ve looked at the relationship between gold and oil before. The relationship at present seems to be signaling that maybe the two of them are reflecting their own realities and not the historic relationship to each other.

The number of barrels of oil needed to buy one ounce of gold is finishing 2013 at level well below historic norms. That makes sense. If gold is a barometer of inflation, it is signaling that the markets don’t have a lot of concern over rising prices. (In fact, the concern now is deflation.)

That’s not surprising, because global inflation remains subdued despite many predictions, over many years, that it was about to surge; the allaying of those concerns got another boost near year-end as the Federal Reserve Board announced plans to begin the taper of its bond buying program.

Meanwhile, the oil market, while considered oversupplied, still is dealing with minimal output from Libya, sanctions-constrained output from Iran, yet another round of chaos in South Sudan, and little output growth from most countries that aren’t the US, Canada or Saudi Arabia. And the US has tacked on about 1 million b/d in new demand in the past 12 months. There are bullish factors present.

gold vs. WTISo as a result, the value of gold relative to oil weakened sharply this year. For 2013, through last Friday, the average oil-gold ratio was 14.52 for WTI; that is, 14.52 barrels of oil would buy you an ounce of gold. Last year it was 17.82. From 1984 onward, as far back as our data goes, it was 15.81.

The stronger Brent market was under 11 barrels/ounce of gold at the close of last week, and the average for the year–through December 20–was 13.06. Last year, it landed on the historical average of 15 almost exactly.

That level of 15 is an historic norm, but the swings around either side of that are enormous. For example, on July 3, 2008, the date of the all-time high settlement on the NYMEX (in excess of $145), it took only 6.43 barrels of oil to buy an ounce of gold. That appears to be the all-time low ratio for WTI. But on December 19, 1998, about the time oil was hitting its all-time inflation-adjusted low, you would have needed 24.68 barrels oil to buy an ounce of gold. So while the 15 number may be close to historic averages, there’s lots of leeway.

And it would be easy to declare oil–which is a financial asset as well as being an industrial commodity–to be overpriced relative to gold at these levels. But given the fundamentals of oil–oversupplied, but with some supply on a knife’s edge–it would also be simplistic.

(Apologies, but we have no data on how many barrels of oil it would take to buy frankincense or myrrh.)

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We wrote a few weeks ago about a claim that US retail gasoline prices generally rise before holidays, which in the case of Thanksgiving proved not to be true.

So we were wondering whether that held for other US holidays, because indeed, it is conventional wisdom that oil companies/traders/forces of nature try to use holidays associated with lots of driving to grab some profits.

We looked at the five weeks leading up to four other US holidays: Memorial Day, July 4, Labor Day and Christmas. We did it for every year starting in 2005. The five weeks we looked at would end with the week that included the actual holiday. The benchmark we used was the EIA’s weekly retail gasoline price data for all formulations. (Even though Christmas this year hadn’t occurred when we looked at the data, we used the five most recent weeks.)

Here’s what we found:

  • The only holiday where the increases almost surpassed the decreases was Memorial Day. Four times prior to that holiday the price rose; five times it went down.
  • The splits on the other holidays were as follows: July 4, three up, six down; Labor Day, two up, seven down; Christmas, three up, six down.
  • So the total for the 36 holidays we looked at was 12 times up, 24 times down.
  • Percentage-wise, the increases were more dramatic than the decrease. The average decrease was 3.51%; the average increase was 7.83%. But the average increase was skewed by two particularly large numbers: a 29.3% increase leading up to Labor Day in 2005, which was driven higher by Hurricane Katrina; and an 18.2% increase leading up to Memorial Day 2009, when the price of oil was in the midst of a surge, coming off its post-crash lows of February and March.

platts



4 Comments on "A wonky look at some data: oil vs. gold, and gasoline on holidays"

  1. Dave Thompson on Tue, 24th Dec 2013 5:18 pm 

    Forget gold and the value of the dollar, energy inputs = economy. How much money or gold to exchange for energy, goods and services is not the issue, when the energy to “do work” is on a downward slope. The rich elite with there massive amounts of chits and markers will find themselves in the same place as the rest of us when the oil all goes away.

  2. GregT on Tue, 24th Dec 2013 5:28 pm 

    Exactly right Dave,

    And when the people finally figure out that all of their chits are markers aren’t worth the paper that they are printed on, the price of real physical assets will skyrocket.

  3. Makati1 on Wed, 25th Dec 2013 1:31 am 

    If our ‘debt’ system dies totally, it is going to be an interesting world, similar to the pre 1800’s, I think. Where the ‘elite’ own everything of value. See history for the life styles of those times. Lords/Kings, upper class ( merchants, clergy.) and you, the serfs.

    BTW: If you are not a Lord before that happens, you are/will be a serf. You cannot buy farmland with worthless pieces of paper/plastic and no mortgages will be available because they no longer exist except in museums.

  4. paulo1 on Wed, 25th Dec 2013 2:23 pm 

    BillT,

    You don’t have to be a lord right now, but I am encouraging friends to buy farm land now…at least those ‘who get it’. However, most of my friends in their late 50s have too much invested in BAU goodies and voice that any other paradigm is simply a fringe position.

    I am their ‘odd’ friend, the old colleague who retired too early for a chunk of land where their wives “would never think of moving”.

    Luckily, mine did. On a positive note a friend from ‘the north’ is relocating on a few acres as soon as possible. Great stuff.

    Paulo

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