Last week I showed a long term graph of the price of crude oil adjusted for inflation. But some may disagree that that graph shows a complete picture since inflation can be misstated and since the US dollar is a worthless pieces of paper. Gold is real money. Or so I’m told. So let’s take a look at crude oil priced in gold:
Well, it turns out that even priced in that “currency” oil is expensive.
In fact, each time that the ratio of oil to gold spikes up, the price of oil (in dollars) falls. The first spike on the chart is in late 1990 and corresponds to the Persian Gulf war.
The next time was in late 2000 when crude oil peeked above $36 and then retreated. The ratio’s significance gets a bit wobbly in 2005 since oil didn’t find a top until the summer of 2006.
And finally, that brings us to today. Or rather last Friday when oil closed up the most dollars in a day in its trading history and hit the circuit breakers. Could the explanation be that the market smells war (with Iran)? Many believe so.
The above graph looks like it might have a slightly upward channel - which would imply that if this ratio has any significance, a top in oil is close at hand.
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