The current behaviour of commodity prices – particularly of oil, the most important commodity of all – is causing sleepless nights to analysts, scientists and financial managers. But not only the FIAT money world is paying attention, also the gold world is looking in wonder on the drop in oil prices. The purchasing power of gold has been steadily rising for a year and thus solved one of the most long – standing questions about gold: The question whether gold is a commodity or not. Ever new arguments have been brought into the discussion by the yeah and no sides. Supporters of a gold standard of course have always known this: gold is NOT a commodity or only in the sense of a money commodity. Since prices for all the “pedestrian” commodities have fallen compared to gold, gold has established itself as a class apart even in the eyes of the most avid doubters. This should put an end to these discussions for at least the next few decades.
But back to the ratio between the only true money commodity and the “black gold”: Naturally, not only gold aficionados know of the gold oil ratio. More and more FIAT money pundits sneak a look at this ratio. Even famous FIAT money supporters such as Bloomberg and CNBC discuss this ratio more and more frequently. There are many reasons for this.
Since 1946 the median lies at 1:17. This means that for the last 70 years one ounce of gold bought on average 17 barre ls of oil. Roughly speaking, the price was moving within the 11 and 20 band, where 20 signifies cheap oil. Deviations from this price band have been rare and of short duration. Whenever oil was relatively cheap, there have been major economic and geo – polit ical changes. It is safe to say that extraordinarily cheap oil (as measured in gold) presages surprising and significant changes.
This was the case in the late 1980s, when the gold/oil ratio reached a hitherto unknown level of 28/29. What’s more, this peri od of more than 20 years was one the longest phases of cheap oil in economic history. We all know what happened in 1989 and after, and quite a few analysts believe that the artificially low oil price was one of the reasons for the demise of the Soviet Union. This also supports the theory that large geo – political changes require a deflationary shock.
But also vice versa, at a very low gold/oil ratio of under 10 there may be major upheavals. I remember June 2008, a time of extraordinarily expensive oil, when the oil price stood at 140 FIAT dollars and gold at 1000 which yields a gold/oil ratio of 7 and lower. What happened three months later will still be fresh in the reader’s memory.
For a year now, we have been seeing a ratio of more than 20 and by January 19, 2016 it had doubled to a level of 40! A level which I would have been deemed impossible until then. The 40 did not last long, but we are still at 38 (February 5). In conjunction with the long period of more than a year (yielding a large time by level “ area”), this poses a dire warning. A warning that either economically or politically something big is in the offing – but what?
Please allow me add some more oil – specific facts for clarity’s sake: It would be obvious if these changes occurred in the Middle East, still the most important source of crude oil. Especially now that – visible to the naked eye – there are political hand – overs taking place. The US have given the tight band to the Saudis some slack and at the same time thrown open the gates to Iran which have been all but shut tight for decades. An instability in the entire region – and subsequently an instability in global oil supplies – could be the result.
Furthermore, OPEC surprises with their current production supply and pricing policies. Many analysts forget that OPEC was explicitly founded NOT only to pursue the interest of the oil – producing countries. Rather, OPEC is supposed to safeguard the interest of ALL three main groups: producers, investors and consumers. (For more detail please refer to the OPEC charter.) Which is evidently what they are NOT doing right now: the current low prices deter investors, exploration projects are delayed or cancelled which is massively interfering with the 6 – 7 year oil cycle. This will be sorely felt in 3 or 4 years’ time when oil prices are bound to surge. Remember 2004 – 2008?
Commodity markets are in turmoil and we will see plenty of volatility – not only in terms of commodity prices but also politically. This we can deduce not only from the gold/oil ratio but by using common sense. Which in turn reflects the gold/oil ratio.
By Thomas Bachheimer, President of the Gold Standard Institute Europe
Published in the latest Gold Standard Institute Report, subscribe here for future updates