Crude price and gold

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Have you ever thought of any relationship between crude price and gold?

As for me, I have never thought of any such thing.

When the prices of petrol was rising many people offered theories why it is rising. A conservative blogger in USA even suggested that the reason is that India and China are giving subsidy to petrol, people getting it cheap and they dont value it as it is cheap. So there is more consumption and also more waste and hence there is this price rise of petrol in USA.

What a reason!

Even after subsidy we pay in India much more for a itre of petrol than what people pay in USA. I mean in terms of money. A litre of petrol in India costs Rs55/- which is around 1.31$. In USA you can buy lot more with this money than we can buy in India.

OK, let us forget about this now.

Why? The crude price is falling. And when it is falling people are finding reasons why it is falling.

Here is a reason published in an Indian newspaper. Surprisingly it links crude price with petrol.
Read below:


Ounce vs Barrel: Golden glow makes global crude oil prices slip
Economic Times, New Delhi, July 31, 2008

The fall in crude oil prices over the last couple of weeks has been attributed to changes in demand-supply conditions, but there is much more to this slide.

The reasoning that oil has risen far too much compared to gold a powerful relationship measured by gold-oil ratio (GOR-has been a trigger for the sell-off in oil contracts by investors, mainly global hedge funds, on overseas exchanges, a person familiar with the development said.

In addition to selling oil contracts, these investors have created long positions in gold, as the ratio indicates that the yellow metal is relatively inexpensive vis-a-vis the black gold. Accordingly, most analysts feel gold may outperform oil in the near-term, as the yellow metal is seen as a hedge against higher inflation, which has been mainly driven by oil prices.

"It (GOR) normally represents a good tool for investors to establish the relative of commodities. It clearly implies buy gold and sell oil," said Nomura International's Asia-Pacific strategist, Sean Darby.

Earlier this calendar year, the GOR, which is calculated by dividing gold price per ounce to oil price per barrel, was in the range of 9 to 11:1, but the ratio has slid to 6-8:1 of late.

The ratio rose to 7.5:1 on Tuesday, from 6.3:1 mid-June. Historically, many investors have seen buying opportunities in gold when the GOR is below 10 barrels/ounce. "Oil is now more expensive than it has ever been, some 30% above the previous peak in real terms," said Credit Suisse, in a recent global strategy report.

So far in 2008, crude oil on the Nymex has risen roughly 30%, even after coming off record levels, while gold has gained roughly 11% in the same period. Analysts, however, add that the GOR is not the only reason for the recent fall in oil prices of late. The likelihood of slackening of demand for oil from its largest consumers, including the US, China and India, due to economic slowdown, is believed to have investors reversing their long positions in oil contracts.

"Our own intuition is that we will reach peak oil demand (the point at which no further growth in supply will be necessary) long before we reach peak oil supply (the point at which no further increase in annual supply will be technically feasible)," Credit Suisse added.

Analysts said another reason for the fall in oil prices is the strength in the US dollar in the last couple of weeks. The dollar has an inverse relationship with oil, which means that oil weakens when the dollar rises.