Crude Oil Very Expensive Even When Priced In Gold

Published June 9th, 2008 in Natural Resources Tags: bubble, crude oil, gold, inflation, long term graph, persian gulf war, price of oil, US dollar.

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:

crude oil priced in gold long term chart

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.

bubble, crude oil, gold, inflation, long term graph, persian gulf war, price of oil, US dollar

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12 Responses to “Crude Oil Very Expensive Even When Priced In Gold”

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1 Holly Jun 9th, 2008 at 8:54 am

This one looks more fact reflective–maybe expensive (for now) but it’s not a bubble yet! It may correct soon but in long run it’s still bullish.
2 chavez Jun 9th, 2008 at 5:45 pm

ya, crude will keep going higher until goldman sachs has all your money, ROFLMAO
3 Babak Jun 9th, 2008 at 9:59 pm

Holly, maybe a longer term chart would be more helpful but I’m lazy and worked with what was available.
4 Edward Kim Jun 10th, 2008 at 7:04 pm

Babak,

Please show the crude chart in terms of the Aussie, Canada, Swiss, and Euro currencies. The chart might look interesting.

Edward Kim
Managing Member
2GTT, LLC
408-248-0388
www.2gtt.com
5 Babak Jun 11th, 2008 at 5:28 pm

Edward, sure although I don’t think it will add much.
6 Bruce Jun 14th, 2008 at 1:06 am

When the oil price starts moving around by 3 and 5 and 10 dollars a day as it has begun doing, I reckon we may be only at the beginning of a very volatile month or two…. good chance to clean up …and be cleaned up!!
7 Elizabeth Sep 16th, 2008 at 12:08 am

Thanks for this great chart. As I’m writing this (Sep. 15 ‘08), oil has “plummeted” to $92 from $148, priced in US dollars. Looking at this chart of crude-priced-in-gold, I bet a RSI indicator here (granted, with your log configuration, but still…) would have shown massive negative divergences that would’ve lead to a great trade (I’m thinking this configuration, though longer term, looks like BP just before Soros shorted and made a billion USD in ‘93). Would you please update this? I don’t know any other site that has this crude-priced-in-gold relationship. Really appreciate it!

Terrific site. Thanks.
8 Babak Sep 18th, 2008 at 1:48 am

Elizabeth, thanks for the compliments I’ll update the chart this week. If I forget, please remind me, this is a hectic time.
9 Elizabeth Sep 29th, 2008 at 7:47 pm

Hi Babak,

I know it’s a hectic time, but you asked me to remind you to update the crude priced in gold chart. It should be a great time to look at this again, given the plunge in oil prices and spike in gold.

Thanks, Liz
10 Babak Sep 29th, 2008 at 9:22 pm

Elizabeth, yes, of course. Thanks for the nudge