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Oil Becoming More Expensive Than Gold
Posted May 13th, 2014
TANGIBLE INVESTMENTS - Los Angeles - by James O'Dell - Gold and silver prices turned modestly lower in choppy trade on Tuesday as gold dipped to $1,293.80 an ounce and silver eased to $19.49 an ounce, after the dollar jumped to a five week high and the euro plunged. This action followed reports earlier that Germany's Bundesbank would support further easing by the European Central Bank (ECB) in June if inflation stays low.
But the market remains skeptical that the ECB will act next month, and for good reason, as many view ECB President Mario Draghi's comments on adding stimulus last week as yet another attempt to talk the euro lower. "The Governing Council is comfortable with acting next time but before we want to see the staff projections that will come out in early June," said Draghi, last week.
Fueling the skepticism are economists' predictions that inflation will soon be on the rise in the U.S. "We know we crossed above trend growth toward the end of last year," said Deutsche Bank's Carl Riccadonna. "And inflation tends to lag by about six quarters, so toward the end of the year we will see inflation pressures start to tick up."
Meanwhile, noted publisher Dennis Gartman, says that the gold/oil ratio, the number of barrels of crude oil it takes to buy one ounce of gold, is falling. Gartman says that when it takes 24 or more barrels of crude oil to buy one ounce of gold, then gold is expensive relative to crude oil. However, he says that crude is considered expensive relative to gold when it costs less than 14 barrels of crude to purchase that same one ounce of gold.
“Presently it ‘costs’ approximately 12.9 barrels of WTI crude to ‘buy’ an ounce of gold, so either crude is expensive or gold is cheap… or both. We put this upon the table for consideration, but we are not willing yet to act upon it for as history shows, truly ‘cheap’ gold is not available until the ratio trades down below 10:1. However, as history also shows, once the ratio turns for the better, it turns hard and it turns long,” explained Gartman.
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