WaveStrength Material Profits for December 6, 2006
Why Oil Bulls Should Be Gold Bugs
By S.R. Nunnally
Have you seen this little turnaround in oil prices lately? Oil's climbed nearly $4 since mid-November. That's 6.5%! It's this type of momentum that can push oil prices out of its two-month trading range, and back into its long-term uptrend.
That's good news for oil bulls… But it's also good news for gold bugs.
You see, I've been researching something called the Gold to Oil ratio. It's based on the historical purchasing power of one ounce of gold in relation to barrels of oil. For the past 60 years, one ounce of gold has bought 15.2 barrels of oil.
Remember that number, because it's the key to a seriously constant investment strategy that you can use for many years to come.
So, if one ounce of gold should buy 15.2 barrels of oil at $63 a barrel, then gold prices should be…
$957.60.
I don't need to tell you that according to this historic ratio, gold is severely undervalued.
With prices currently at $635.90, gold would need to rise 50.6% to bring the Gold to Oil ratio back in line!
Here's where the constant part comes in… Every single time in the past 60 years that the ratio dips lower than 11 (that's when one ounce of gold buys less than 11 barrels of oil), there has been a massive correction in either the price of gold (rising) or the price of oil (dropping).
Every single time.
The current ratio is at 10.09. That means we're on the verge of a huge correction. Just look at these examples of when the ratio was below 11:
- In 1976, the blueprint sat at 8.2. In the next four years, gold prices rose 393%, from $124.71 to $614.61. A $10,000 investment would have turned into $39,300…
- In 1985, the blueprint was 10.6. By 1987, gold prices rose to 41%, from $317.18 to $446.28. A $10,000 investment would have turned into $14,100…
- And as recently as 2001, the blueprint was as low as 8.1. By last year, gold prices had risen 63%, from $272.67 to $444.47. A $10,000 investment would have turned into $16,300.
I think you're starting to see how lucrative this Gold to Oil ratio can be, and why oil bulls should be gold bugs too. If you're an oil bull and you think oil's going higher (like me), then it should naturally follow that gold prices will rise as well.
Let's put oil at $70 a barrel. A mere $7 away from current prices. At $70 a barrel, gold could potentially rise 67% to $1,064.
At $75 a barrel we're looking at $1,140… a 79% rise!
But this Gold to Oil ratio is perfect for today oil markets. Let's say you're not an oil bull, and you think oil will drop back down to $55 a barrel. That's not inconceivable. At $55 a barrel, gold would still need to rise 31.5% to bring the ratio back in line.
In fact, oil would have to drop to $41.82 a barrel to be in sync with the ratio.
Now, I don't know about you, but I haven't been hearing too many analysts predicting oil at $40 a barrel recently. That's why this ratio is so powerful, especially if oil continues to rise.