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Page added on December 27, 2014
The diverging paths of gold and oil in 2014
Gold is a commodity that in the real world doesn’t get used for a whole lot of truly important things, but is seen as a financial asset, and always has been.
Oil is a commodity that in the real world makes modern life possible, gets used for many, many important things, and yet is also seen as a financial asset. It hasn’t always been as that last descriptor, but it’s been that way for awhile.
In the past year, the fundamentals of the industrial asset–oil–ripped through the market in the last few months of the year and sent the price of that commodity plunging. And during that same year, the so-called “safe haven” of gold actually turned out to be something like that in the face of global upheaval, after an extremely bearish 2013. The metal’s price basically didn’t do much of anything over the course of the year.
The end result is that the relationship between oil and gold diverged fairly significantly from historic norms by the end of 2014. Since we started doing these annual snapshots at the relationship between the two, volatility has reigned, even as the long-term average rarely budges too far from 15. That ratio means that historically, it has taken 15 barrels of oil to buy an ounce of gold.
First, the basics. Gold opened the year at about $1,230/ounce and closed the year at $1,175/ounce. That’s a decline of about 4.4%. WTI, meanwhile, opened the year at about $95.50, was assessed by Platts as high as $107.53 on June 20, and then plummeted to around the $55 level by the end of the year. So from top to year-end bottom, that’s down almost 50%.
The result in the oil/gold ratio is that it opened the year at about 12.8, didn’t stray all that far from there into September, but then blew out to about 20.5 by the end of the year. For the full year through December 23, the ratio averaged 13.73, but it was 16.37 for the last three months of the year. Similar trends were seen in the Brent market as well.
And in the final days of the year, when the ratio broke through 20 and stayed there, you needed to go all the way back to September 2011, after another short-term plummet in the price of oil, to find that many consecutive days where the ratio was above 20. So what’s happening here at the end of the year is far from the norm. Oil is very cheap relative to gold.
It isn’t all that hard to figure this out. There are deflation fears in Europe and Japan, and to a lesser extent in the US, so one would think that might send gold on a downward spiral. Yet in a year of ISIS/North Korea/Syria/Israel-Gaza, that sort of tension appears to be holding gold relatively steady. This despite the fact that a year earlier, the so-called “safe haven” of gold shed more than $450 in the course of about 10 months, a decline of more than 25%.
But oil is being seen for what it is: an industrial commodity with way too much supply relative to demand. And so if you want to buy an ounce of gold with those extra barrels here at the end of 2014, it’s going to take more than 20 of them.
10 Comments on "The diverging paths of gold and oil in 2014"
Nony on Sat, 27th Dec 2014 11:06 am
How is this different than just looking at gold versus dollars? Especially since gold was close to flat in dollars in 2014? [It’s not different.]
Instead of this gold mumbo jumbo, just look at the simple story of oil price dropping in any currency. Supply-demand (and the expectations of future supply demand) are what drove the drop in oil.
Who cares about gold?
ghung on Sat, 27th Dec 2014 1:41 pm
“Who cares about gold?”
Was that a rhetorical question or just a really dumb one?
GregT on Sat, 27th Dec 2014 3:57 pm
It is believed that over ten times as many gold certificates are sold on the market, as there exists physical gold. The gold market is highly manipulated and in no way reflects the true value of gold bullion. At some point the ponzi market casino will come crashing down, and paper certificates will be worth nothing more than the value of the paper that they are printed on. The same will be true for paper currencies.
Gold has been a store of value for over 6 thousand years, and remains a store of value today. The general populous is so completely dumbed down, that they have no clue as to what is real anymore. The entire market casino is a confidence game, and when that confidence is eroded, people holding paper certificates will be left with nothing more than poor quality toilet paper, or fire starter. History has a nasty tendency to repeat itself. Those who ignore history, are destined to repeat it.
Those who place Econ 101 above biology, physics, and mathematics, are nothing more than simple fools. A fool and his money, will be soon parted.
Harquebus on Sat, 27th Dec 2014 5:06 pm
“the difference between currency and money”
http://hiddensecretsofmoney.com/videos/episode-1
Apneaman on Sat, 27th Dec 2014 5:18 pm
“Those who ignore history, are destined to repeat it.”
And those of us who don’t are forced to watch the rerun and get dragged down too. Prior to every collapse/calamity there were a small minority of observant bell ringers, both great and small, that were ignored or silenced. Churchill comes to mind. He warned about the Nazis for years and was ridiculed/ignored.
Makati1 on Sat, 27th Dec 2014 6:34 pm
GregT, I couldn’t have said it better myself. Have a great 2015!
trickydick on Sun, 28th Dec 2014 12:17 am
Traders care about gold, because if you are going to make a decision about buying something or selling something, such as oil, it’s useful to establish its value. Stocks have earnings and thus, the P/E ratio. All things being equal, such as balance sheets, earnings growth rates, etc., you’d be better off buying a low P/E stock, because it has more value.
Oil has no earnings stream to analyze. Comparing it to dollars is not useful. Comparing it to another commodity is VERY useful. Now you have a valuation ratio. Looking at gold and platinum as a multiple of silver is useful.
I like these ‘real’ indicators, these valuations, otherwise known as fundamentals. Don’t ask me to buy and sell based on a moving average crossover, stochastics, MACD, etc., known as the technicals. Trendlines are useful as entry and exit guesstimations, but that is the only technical indicator I use (support and resistance).
All that aside, the writer says ‘oil/gold ratio’ and WTI vs gold. It should say Gold to Oil ratio, not vice versa. An annoyingly poor error to make on this topic!
Makati1 on Sun, 28th Dec 2014 7:42 am
trickydick, if I understand your comment, you say stocks are better than gold?
trickydick on Sun, 28th Dec 2014 1:34 pm
Mak,
No, didn’t mean to convey that stocks are better than gold right now. All things considered, I like the silver ETF (SLV) and the solar ETF (TAN).
That advice of course, is for your play money, not your retirement plan.
agramante on Tue, 30th Dec 2014 9:27 am
Trickydick–it sounds like you know a thing or two on this topic. I’m thinking of starting to buy precious metals at some point in the future–do you have any good references (like I’d point someone toward “Oil 101” for an education into the petroleum & gas industry) for a relative newbie like me to start becoming familiar?