It’s worth it to also look at gold in terms of oil. That is, how many barrels of oil will an ounce of gold buy you? Take a look at the chart below. And think of it as a ratio between optimism and fear. The higher the ratio, the more fear. The lower the ratio, the greater the optimism.
The chart above only goes back to 1969. But you can see the same story: investors generally flee to gold as a “safe” asset when everything else looks dodgy. On the other hand, oil is a proxy for growth (which I associate with optimism.) The ratio at the end of January – before oil prices fell further and gold prices rose this week – was already at a generational high.
Deutsche Bank analysts reckon the current ration – just under 45 using my calculations – is the highest in 124 years. Their data goes back to 1865 – the year the American Civil War ended, and just six years after Colonel Edwin Drake drilled the first oil well in Titusville, Pennsylvania. In other words, this is the cheapest oil has been relative to gold since the dawn of the Industrial Revolution.
Think about that. While you’re thinking about it, there are a couple of ways to look at it. First, the world has too much oil. Way too much oil. Too much productive capacity. Too little economic growth. Too much potential energy for a global balance sheet flattened by too much debt.
That’s the supply story for oil. But for gold it’s a demand story. Oil is being priced like a commodity with an excess of supply. Gold is being priced as money. Or as Charlie says, “gold is a perpetual and irredeemable bond with no counterparty risk, issued by God”. Its current rally in multiple currencies is a vote of “no confidence” in the monetary world central bankers have created.
Category: Market updates