GOR, the Gold/Oil-Ratio


Recently gold hit the $1,000 barrier, but retreated again towards a level of $900. In the meantime, oil stood under pressure and hovered for a long time around the $40 level. It is clear that for a long time gold sentiment was extremely bullish, while that of ‘black gold’ was extremely bearish.

Maybe this sentiment might deliver a golden opportunity: Long oil versus short gold.

I also seek confirmation using the GOR, the Gold/Oil-Ratio.

This ratio shows how many barrels of oil can be bought with one gold bar. At the moment, the GOR is ‘trading’ around 20.

To put this in perspective: For the last three decades the GOR has almost never showed a value under 10, or over 30.

Historic high

A GOR value of around 10 is considered a good moment to buy (long gold/short oil), while a value above 10 is considered as a good sell moment.

Of course, all this is under the proviso that nothing fundamentally changed at the oil and gold market.

The common consensus is that ‘extreme’ highs and lows sooner or later reverse to the historic mean. In 2008, when oil peaked around a level of $147, GOR showed a value of 6. That meant a good opportunity to sell oil and to buy gold.

The current situation is now completely reversed: Gold is trading around $900 and oil is trading around $44. Beware market exaggeration however: In the 1980’s and 1990’s, GOR showed values of 30, or even 35.

One possible strategy could be to take one third of the desired total short position around this level. A next portion to sell around a level of 30 and the last position at a level between 35 and 40. In this case, an investor needs deep pockets and an iron patience, as well as long term vision.

Another strategy could be (depending of the risk tolerance of an investor) to sell gold and buy oil at the current levels and to increase the position when it is showing a profit, while the GOR is returning to its historic mean, and consequently to close out the positions.

Source : AMEInfo

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