CHART: Gold now looks very expensive vs oil
After Monday's rollercoaster when gold's highs and lows were nearly $80 an ounce apart, relative calm returned to the market on Wednesday with the price ending back above the psychologically important $1,200 an ounce level.
In late afternoon trade on the Comex division of the New York Mercantile Exchange gold for February delivery was changing hands for $1,209.60 an ounce, up just over $10 or nearly 1% from Thursday's close.
Gold's gains since hitting four-year lows early November now top 5% and is made more remarkable by the fact that the advance has come despite a rampant dollar, rising bond yields, record-setting equity prices in the US and a tumbling oil price.
The physical gold market is also being pulled in all directions with Monday's no vote in the Swiss gold referendum eliminating the possibility of a 1,500 – 1,800 tonne buyer entering the market, offset by the lifting of gold import curbs in India which should easily make the Asian nation the top consumer of the metal once again.
While probably more a function of the dramatic slide in crude rather than the strength of the gold price, when considering the ratio between the two commodities, gold is starting to look expensive.
Gold and oil usually rise and fall in tandem – rising oil prices pushes up inflation increasing demand for gold as a hedge.
Since 1970 the average ratio – how many barrels of oil can be bought with one ounce of gold – is 15.
After trading between 12 and 13 for more than a year, the ratio has now shot up to just under 18 now, which suggests that gold is overvalued compared to oil.
The ratio last climbed above 18 in December 2012, when gold was trading around $1,700 an ounce. When gold hit a peak above $1,900 in September 2011, the ratio topped out at 20.5 before dropping all the way down to 15 before the end of that year.
In the months before the Lehman brother collapse of September 2008, an ounce of gold bought fewer than seven barrels of oil.