The Gold to Oil Ratio Does Matter


"At all times and in all circumstances gold remains money. It is the most powerful currency in the world."

Seasonally, oil (USO) is extremely weak from October through December. In 2008 oil started October at about $100 and ended December around $40a monstrous 60% decline. Oil is strongest seasonally from July through September with the strongest individual months being January and August. Oil's 200dma sits right around $100, appears to have hit around its bottom and the 200dma is exerting a gravitational like effect pulling oil prices up.

By contrast gold's 200dma is at about $860 per ounce. Gold (GLD) has recently passed through its strongest seasonal period from September to December. It maintains the uptrend from January to March, is asleep the rest of the year except for a strong rally in May. While seasonality is helpful, it does not etch the future in bullion and this year has been different. The Gold/Oil ratio is now about 23 barrels of oil per ounce of gold. The 200dma is about 9.5, and the historic average is around 15.

At all times and in all circumstances gold remains money. It is the most powerful currency in the world. Oil is the world's primary energy source, which is why the gold to oil ratio is important. Gold is the most effective tool humans have to perform mental calculations of value.

The world has a very serious problem. Because it has used a fiat currency with no definition or basis in reality for nearly 100 years and because oil production was constantly increasing during that time, the effects of unwise capital investment were masked. Energy Return On Energy Invested (EROEI) calculations were not even performed. A fiat currency attempts to sustain the unsustainable while a commodity-based currency employs the strict laws of reality to ensure the unsustainable is not encouraged.

The entire infrastructure of the entire world was built using mental calculations of value based on a derivative illusion. As natural and economic law assert reality and gold begins circulating as currency in ordinary daily transactions, the distortions will be removed and the gross misallocations of capital will be revealed. I wonder what such a world will look like?

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