Is An Oil Shock Coming This Summer?

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"Typically, when the gold/oil ratio starts somewhere in the single digits and then breaks above 14:28 within a relatively brief time frame, one should be on the lookout for an oil shock twelve months after the gold/oil ratio peaks."

Seeking Alpha, John Overstreet

A "Leeb oil shock" is the term I use to describe occasions when the year-on-year price of WTI crude exceeds 80%. As far as I know this was first pointed out by Stephen Leeb in his book The Oil Factor. According to Leeb, stocks (particularly the Dow) tend to rise until year-on-year crude increases 80% and then fall until crude falls below a 20% increase.

In fact, every Leeb oil shock we have ever had has been preceded by a massive rise in the gold/oil ratio, with the sole exception of the 1990 oil shock apparently triggered by the Iraqi invasion of Kuwait. (Note: I am going to speak of the gold/oil ratio instead of the oil/gold ratio since I believe it will make it easier to picture the relationship.) In the case of Kuwait, the gold/oil ratio had, rather unusually, never retreated after the 1987 oil shock.

Unfortunately for people forecasting markets, not every "massive rise" results in a Leeb shock. Once in the mid-1980s and once in the mid-1990s, these kinds of moves did not result in anything approaching a Leeb oil shock. And, once in the early 2000s, a massive rise in gold/oil brought us to the brink of a Leeb shock but then retreated.

The key number in the gold/oil relationship is 14.28. (Note: This is 0.07 in terms of oil/gold.) Typically, when the gold/oil ratio starts somewhere around 10 or in the single digits and then breaks above 14.28 within a relatively brief time frame (say, within a year), one should be on the look-out for a Leeb oil shock twelve months after gold/oil peaks. . .View Full Article

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