When the price of oil is up, it’s usually a sign that the economy is doing well. With gold though, it’s usually an indication of fear. And when the price of gold goes up as the price of oil goes down, then consider preparing for the worst. The gold-to-oil price ratio climbed past 30x in late-December, which could prove to be a really big problem.
If you click on the accompanying graph going back more than 30 years, then you will see that whenever the ratio exceeded 22x (yellow line), a crisis ensued every time due to problems around currency, debt, banking and the price of oil. The ratio just last month in January approached 36x, which was the highest level in more than a generation.
What could be the cause of what appears to be an inevitable crisis?
There are so many possible explanations to choose from. For example, the Russian Ruble has crashed again, so we could be observing the beginning of another Russian Financial Crisis. The price of oil has also crashed once again, so this could be a repeat of the previous Oil Price Crisis. Related to oil, junk bonds are increasingly being downgraded and the market for them has been described as illiquid, which points to the possibility of a debt crisis. Given the mountain of debt that is still rising at Chinese companies, the Middle Kingdom could be facing a banking crisis. Or it could be due to the latest round of competitive currency devaluations in Asia, so we could be in the midst of another Asian Currency Crisis. Take your pick. Perhaps it’s the combination of these different potential crises happening all at the same time is why the price-to-oil ratio was very recently at its highest level in more than a generation.
Whether or not you believe another currency, debt, banking and/or oil price crisis is inevitable, please consult an investment fiduciary before making any investment decisions.
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