Top > Business > 2005 > December > 2005-12-15

Gold Bullion and Crude Oil Go Hand in Hand

It has been historically proven that there is a correlation between the price of gold bullion and that of crude oil. In general, over the past 60 years, one ounce of gold has had the purchasing power of approximately 15 barrels of oil. However, with the ever increasing price of oil, currently standing at $59, the ratio has fallen way below average at 8.9 barrels per ounce of gold. The price of gold has not been sitting out the commodity rally through. It`s up nearly 13% in the last month, and 21% in the last year. With oil unlikely to decline below $50 anytime soon, the price of gold is likely to rally in the coming years - and in a big way. Historical data shows that when the ratio falls below 11, where one ounce of gold will buy you 11 barrels of oil, the ratio not only will come back in line with the average, but that conjecture drives the ratio above the historical average of 15.2, as has been evidenced every time that the ratio fell below 11.

In late November, gold began trading as an electronically traded fund, or ETF, and can be purchased just like a regular stock. The ETF is Street Tracks Gold Trust, which is run by the World Gold Counsel and marketed by State Street, with investments of $550 million in its first day of trading. This is an indication that investors are warming up to the idea of buying gold. The fund purchases gold and is designed to track the price of gold. Shares trade at 10% the price of an ounce of gold, and were recently trading at $52.33.

Let`s assume that the price of crude oil falls to $50 per barrel. Using the historical 60 year average ratio of 15.2 barrels of oil per ounce of gold, this would mean that the price of gold would move from $525 per ounce to $760, an increase of 45%. Assuming the ratio moves above 15.2 on over speculation in the gold market in the coming years, there could easily be an be a price tag of $900 or even +$1,000 per ounce of gold. For investors looking to gain exposure to the yellow metal, it has never been easier to get into gold.