Gold-oil ratio suggesting some type of market crisis, history shows
Jeff Desjardins of the Visual Capitalist just released another stunning infographic titled Three major reasons for gold in 2016.
His first two reasons are; 1) Gold has produced over double the returns of the general market from 2008 to 2015; and 2) two-term presidents have historically seen the stock market sink significantly during their final year in office.
But the third reason is one that has been front and center in the markets for at least the past year: the collapse in oil prices.
Above 20 is warning sign: The gold-to-oil price ratio, or the number of barrels of oil that can be purchased with one ounce of gold, continues to signal danger, running between 37 and 40 in recent days. That means that one ounce of bullion can buy between 37 to 40 barrels of oil.
History shows that whenever the ratio is above 20, that there is some type of market crisis, Desjardins writes.
A recent Reuters article also explored the grim ramifications of the gold-oil ratio. Although historically a rising oil price has been beneficial for gold because of the inflationary implications, this time around bullion is moving higher as the fear traders pile in for safety.
Gold key for insurance: The fact that oil and other commodities have collapsed means the economy is in trouble, which should be positive for gold, Societe Generale analyst Robin Bhar said. I suspect that because there is uncertainty, gold will play a role as an insurance policy.
And Ava Trades chief market analyst Naeem Aslam added: We envisage that a bottom is firmly in place for gold. It could be the best performing commodity for this year.
One thing that the falling oil price will do is keep the Federal Reserves rate-hiking plans at bay or on hold. Zero Hedge just reported that oil inventories in the U.S. are now as high as they were during the Great Depression, in November 1930.
Wave of oil bankruptcies loom: And BlackRocks CEO, Larry Fink, is predicting a wave of bankruptcies across the energy sector as oil and gas firms go under. Bloomberg is projecting that independent American oil producers will report losses totaling $14 billion in all for 2015.
The end result of all this will be that the Fed not only will be forced to keep rates lower instead of hiking, but might in fact be forced to embark upon new rounds of quantitative-easing rescue programs.
They have said they thought they would raise four times plus this year and I dont think theres any scenario in my mind that theyll be able to do anything remotely like that, said University of Chicago economist Austan Goolsbee, former chairman of President Obamas Council of Economic Advisers in 2010-11.
Its far more likely that theyll have to reverse themselves as a number of other countries have, like Sweden and others, where they raise the rates thinking itll be fine and then have to drop it.
Lower rates for longer is more monetary debasement, and that means more potential news for gold prices in the future.