A talking head on television this weekend was discussing the worldwide price of rice, and noted that its relationship to gold had changed little. Over the past several months, she said, the amount of rice that an ounce of gold would buy had not changed significantly.
This, of course, led The Barrel to check what had happened to the relationship between gold and oil these last few months. The numbers are sobering.
We compared the price of the Handy & Harman daily gold fix to the Platts' daily assessment of WTI. The question: how many barrels of WTI would an ounce of gold buy?
We started with last September, when the number was about 9 barrels per ounce. Beginning in January, the number soared, as the price of gold climbed and oil fell. By February 6, the number of barrels of oil that you could fetch with an ounce of gold had risen to 10.35.
The change since then has been remarkable, and it strongly undercuts the idea that the rise in the price of oil is simply a financial phenomenon. If gold is the ultimate storehouse of value and the currency of last resort, a commodity that is being driven primarily by currency factors should not be strengthening against that currency.
But as of last Friday, an ounce of gold could only buy 7.44 barrels of WTI, a strengthening of more than 23% since the February 6 alternate peak. The purchasing power of an ounce of gold has strengthened by almost one full barrel just since April 11.
With the gains in oil in Euro terms, and in gold terms; the fact that diesel has outperformed crude; and now with with the recent declines in production that we wrote about in this post , the case for fundamentals being in the driver's seat in this market is looking stronger every day.
But Platts' LInda Rafield reports that these sort of levels are far below historic norms, meaning either that crude is going to come off or gold is going to rise to get back toward those norms. Just since September, that average ratio is 8.97, and if gold were to hold at current levels, oil would need to fall to about $100.50/b to reach that level.
Who decided gold was worth anything? Can't eat it. Can't do much of anything with it except look at it, use it on satellites and electronics, make a few teeth and so on. How about this: How many ounces of a basically useless metal will a bushel of wheat buy? At least you can eat wheat.
Like it or not, gold has been a proxy currency for thousands of years. When gold fell hard in the late 90's, its role as an inflation hedge and a representative of economic conditions often was mocked. But it wasn't mocked as it soared through this decade. Like it or not, it's a form of currency, and that isn't changing anytime soon.
John, I'm familiar with the history & use of gold as currency in lieu of straight bartering. But you didn't answer my question. Many societies have used other "things" as currency - seashells for example - or a handful of beads - through the ages. My point is that gold is only of value thru tradition and because somebody at some time in the distant past convinced the idiots of the time that it was worth something. I'd just like to know who that was.
Ahhh..the glitter of gold, yet, not much practical value to human. At the end, just like the beginning, water and food will ultimately be the most valuable commodities around.
Where are the charts? Where is the long-term historic perspective? I mean, who cares if the blip on the screen of the last couple months is positive or negative (unless of course in an arbitrage sort of sense..)
Cheers, Dom
Further comments to Shahar and GermanDom:
--The chart I did was just since September, so in that sense, it's a blip. However, my post did not that this was a change over the short term. I also made reference to the work my colleague Linda Rafield had done on the long-term, and that this recent level was below long-term levels.
For Shahar: Yes, water and food are ultimately more valuable, being necessary for the survival of life. But gold has always been a currency that enabled the acquisition of them, even if it does seem illogical at times.
I wrote more extensively on this topic, cum chart, recently: www.energyinvestmentstrategies.com
Jim
It's hard to believe that there is someone who truly doesn't understand the power of gold! It is true that an ounce of gold is worth less than an ear of corn to a starving man, but that is a very unrealistic scenario. There may be food shortages, and there may be people starving to death, but there is always going to be people with food. And for those that have a full belly, they aren't all that interested in accumulating mass amounts of food. That is what gold is for. It would still have great value even if half the world was dying of starvation.