January 15, 2008
ANOTHER BUY SIGNAL FOR GOLD
Question for DailyWealth: Gold is up a hundred bucks since December... Is it too expensive to buy?
Answer: While we're always leery of buying an asset after a large rally, we still see great value in gold. Consider the "gold/oil ratio."
This simple ratio is the number of barrels of oil an ounce of gold will buy. For example, if gold is $800 an ounce and oil is $80 per barrel, the ratio is 10. Historically, whenever the gold/oil ratio dips below 10, gold is considered cheap relative to crude oil, and it's a safe bet gold will outperform oil over the following year. When the ratio climbs above 20, the opposite is true... It's a great time to buy cheap oil and short expensive gold.
As you can see from today's chart, the gold/oil ratio is just below 10 right now... gold is still cheap against crude. Considering gold's rosy fundamentals and the dampening effect a recession could have on oil prices, expect the ratio to continue in favor of the yellow stuff.
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