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Tuesday, May 17, 2011

Gold Crude-Oil Ratio

There had been an evident relationship between Gold and the Crude-Oil price. Rising Crude oil induces inflation and Gold is considered as the best hedge against the inflation.
Apart from this, revenues collected by Crude-Oil sales end up getting invested in Gold and thus imparting upward pressure on Gold price.
Gold Crude-oil price ratio is the price of one ounce of Gold in dollars divided by the price of one barrel of Crude-Oil in dollars.
In simple words, the ratio tells us how many barrels of Crude one ounce of Gold can buy.
When this ratio rises above 15, this means Gold is getting dearer (or Oil getting cheaper) and the vice versa.
If we plot Gold-Crude oil ratio since 1946 we find this ratio tends to settle at 15.
Many times there were wild swings on either sides but ratio ultimately retraced to 15.
While writing this, Gold price (1493 $/ounce) and Crude-Oil price (97 $/barrel) gave the ratio 15.39, which indicates both Crude and Gold are fairly priced.
This ratio gives pretty clear idea how expensive precious metal presently is.


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