The gold price has finally begun rising again in terms of the oil price...
AS WE EXPECTED, the "gold-to-oil" ratio is working in gold's favor right now, with the gold price rising in terms of crude, says Steve Sjuggerud's Daily Wealth email.
Back on July 26, we noted how the "gold-to-oil" ratio was ready to snap back. At the time, we reminded readers how this kind of "ratio trade" isn't a conventional "buy a stock and hope it goes up" trade.
"Ratio trades" – like measuring the price of gold in barrels of oil – involve trading one asset against another asset. For example, one of the most important ratios in this group is the "gold-to-oil" ratio.
Since they are both commodities that have intrinsic value, gold and oil can be affected by the same buying and selling pressure in the market. But their values can get out of whack.
When this happens, traders can step in to sell gold and buy oil... or buy gold and sell oil. The profit on these trades depends on how the two assets move against each other. We used this analysis to time – almost to the day – the epic 2008 bottom in crude oil.
From late 2012 through last month, the gold-to-oil ratio fell from 20 to 12. This means gold collapsed in value relative to oil, with one ounce buying only 12 barrels after buying twenty.
In our July note, we pointed out that this decline left gold and oil in an extreme position. Hedge funds also held extreme bearish bets on gold...and extreme bullish bets on oil...in the futures market. And as you can see from the chart above, our note was well-timed. The gold-to-oil ratio has bottomed, and just staged a short-term breakout in gold's favor.
courtesy of goldnews.bullionvault.com
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