OIL TO GOLD: Is a shift possible?

Is your investment in a certain return portfolio? Analysts get a huge compensation for that. Not always as the market stinged a large group of such predictors in the last 18 months. However bullish or bearish the mantra may be, but after all, the root remains intact. Lessons to be learnt; invest in commodities; not papers. Then there was up roaring of the signals: can we hedge oil against gold or vice-versa. Let’s hire some of the facts of the stable and unstable blocks in the last couple of years to recount this option. The story from the first Q 2006 to last Q 2007 was what everyone believed. Gold index follows the oil Index. The gold oil ratio presented a static picture. Researchers and analysts all over the world were busy suggesting not to hedge gold for oil. And it was true too. Inflation, business making money, hikes in the salaries, that’s where the flocking started. Let us understand the sanctity of the relation between oil and gold. No disputes, both are important and required; but oil because of its indispensability and gold for its lustre. The factors on which the basics of trading of these two commodities depends remains at the extreme end of the measuring bar. The price of oil is derived from the history of events and turmoil of bloodsheds. There has been a significant change in the oil systems around the globe just to prevent a dilapidation of the economy. The share that it bears with the economy of the globe is far more than what is represented by gold. Or can traders make it happen the opposite way round? The gold oil ratio was round 14.3 a couple of years and that shrank closed to 7.5 in the last year. The oil price is pendant from a number of frequent skirmishes: between Israel and Iran; usual problems in Iraq, Nigeria etc. Its supplies have always remained vulnerable. Until recent disruption in the oil prices, it was not advisable to hedge one’s portfolio of oil with gold. But the uncertain in the crude oil prices has made the hedging in the gold quite favourite. Let us explain it in a better term. Gold oil ratio shrank from 14.3 to 7.5 twelve months before, but that was a shift from the long term chart, i.e. the average number of barrels required to buy one ounce of gold is around 14.5, which was then at 7.5. But that does not necessary meant that the gold prices would hike by 14.5 times to $1700. Rather today’s oil price of $70/barrel again brings back gold oil ratio to the normal range of 14.5. Evidently facts and research methods for analytical interpretation shows the same trend. For stable market condition replacing gold with oil goes on return only when proper arbitrage is

concealed. But for unstable market condition it all depends on the correlation factor and percentage level of confidence someone risks. “Or some dreamer would definitely wait for Echelon system to support him with cashful information ahead of the everyone....explained beautifully in movie- Echelon Conspiracy”. Analysis of first time block: first Q 2006 to last Q 2007, it was imperative that the gold oil ration was static. But after that the correlation between the two remained very volatile and failed in the respective tests; whether really oil prices has granger caused the gold price. The prices of gold have remained stable for last couple of decades and had not been witnessed by any noticeable volatility or disruptions. Unlike the vulnerability of oil, which apart from providing huge windfall profits to some. But at the same time its collateral losses has heavily walloped the economies of developing countries like India, which neither has a sufficient proven gold reserves nor supercharged in oil reserves.

By:Shankar Deo Rajpal (UPES, Dehradun)

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