Gold & Oil: A Historical Ratio Turns Bad
- Valuations relative to global benchmarks oil and copper are near historic highs (i.e an ounce of gold buys a whole lot of either)
- The correlation with the red metal is zero on both a 1-month & 3-month basis - a highly unusual combination!
- Looking forward, the the 5-day correlations with gold & copper are negative - the yellow metal is traveling on a different highway; going to a different destination.
I have recently submitted an update on the gold and copper price ranges discussed in the last issue below - gold is starting to show some glitter, pardner!!
The online version:
For old times sake, The Eureka Miner will feature photos and excerpts from the past in this report and ones to follow. Here's an oldie interview with Barrick Gold ex-CEO Aaron Regent from September 23, 2010:
Was Aaron Regent right about gold and oil? Checkout the "Chart to Watch" below.
It would be great if gold price would return to $1,300 per ounce this year, so far it's showing a lot of strength. Thursday Comex gold touched $1,240 presently trading at $1,228.4. I believe the 2-month uptrend is still intact. It is important to compare gold performance with currencies instead of commodities in this environment. My morning input to the Weekly Kitco Gold Survey:
On the currency front, gold continues to bullishly rise in euro terms peaking at EUR 1,110 yesterday. Gold in yen terms has softened with a strengthening Japanese currency but is still more than 13% above its 2013 low. By comparison gold in euro is more than 25% above this key benchmark. Yellow metal progress against major devalued currencies is a bullish indication.
All-in-all the Lone Wolf remains bullish and reiterates last week's target.
My vote is up. Next week’s target $1,260 per ounce
The red metal is faring pretty well too. I thought copper may return to the sub-$2 basement after the Chinese traders returned from New Year holiday. Instead, copper got a bid rising from its February 11 low of $1.998 per pound to a high today of $2.0940, a nearly 5% rise.
Copper mammoth and benchmark miner Freeport McMoRan (FCX) is also showing signs of life trading at $7.05 per share up from its January low of $3.52 - a 100% improvement!
Barrick & Newmont on a Roll
It is exceptionally encouraging to witness Nevada's two big mining giants recovering from the depths of 2015. From September's low of $5.91 per share, Barrick Gold (ABX) is up 119% to trade at $12.94 this morning. Newmont (NEM) is up a respectable 65%; from a September $15.43 to $25.60 per share.
A sobering comparison is Barrick at $46.78 and Newmont at $64.30 per share in today's oldie September, 2010 report. Those were the days - let's hope the worst id behind us, pardner.
Chart to Watch
The ignominious demise of a gold & oil platitude [updated with corrections 2/24/2016]
In 2010, Barrick Gold ex-CEO Aaron Regent cited a historical gold-to-oil ratio of 15 bbl/oz when asked if $1,300/oz was an excessive price for gold. His reply was that gold price was in inline with the "historical average" for the ratio. [Regent Video CNBC News, 9/23/2010]
This model has followed Mr. Regent down the mine shaft.
Lesson Learned: A technological disruption (fracking shale) has dramatically changed oil's valuation relative to gold - somewhat like comparing the value shift from wooden wheels to rubber tires. It is anyone's guess what the new steady-state ratio will be.
Over the same QE-2 to QE-3 period, the gold-to-copper ratio was 420 lbs per ounce. Again, reasonably close to Aaron Regent's average. The current 3-month average ratio is 530 pounds per ounce. Gold value relative to copper has been slowly trending higher since mid-2006.
S&P 500 high: 2,134.72, 5/20/2015
Then from the late December high, the February downdraft:
S&P 500 high: 2,081.56, 12/29/2015
S&P 500 low: 1,810.10, on 2/11/2016 down 13.0% & 15.2% from 5/20/2015 high
S&P 500 bear market begins below 20% at 1,707.78
We're still below the Dec-Feb fib box - a very bearish indication.