Saturday, March 5, 2011

Gold/Oil and Silver/Oil Ratios - Then and Now

Back on February 23rd I wrote a blog about the geopolitical situation in the late 1970s and how that was similar to what we are seeing now, (Link) I also proposed that we might also see an energy crisis come out of the Middle East situation, so this morning I've decided to have a look at the ratios between Gold/Silver and Oil to try and guess where we might see prices end up in a similar blow-off peak.

Before diving into the data I thought I would once again share the sources. The WTI Oil price data came from Economic Research section on the Federal Reserve Bank of ST. LOUIS website (Link). As per usual the Gold and Silver price data came from the Perth Mint, I used the monthly London Fix (PM) Average (Link). It's worth noting that the charts and data I am using are monthly, so they will not be the absolute peaks, but in reality I would prefer to use monthly as I think it would be an unrealistic expectation for most to be able to trade, exit or enter positions at the daily peaks/troughs.

Here are the charts. The first depicts January 1975 to December 1981. The second depicts January 2004 to February 2011.

January 1975 to December 1981

January 2004 to February 2011

So in the charts above we can see that Gold peaked at a ratio of just above 20 (20.77) to Oil in January of 1980. Silver peaked at a ratio of 1.20.

Over the period of 1978 to 1980 we saw the price of Oil better than double. It moved from $14.85 at the start of 1978 to $39.50 in April 1980 (it was $32.50 at the Gold/Silver ratio peaks in January 1980).

Today we are seeing expectations of a similar move in Oil  prices (almost doubling in price) as the Middle East troubles develop.
Crude prices will touch $200 a barrel if the Arab revolution spreads to Saudi Arabia, the Centre for Economics and Business Research (CEBR) said on Friday.

'... the revolutions around the Arab world have pushed up the price of oil which had temporarily stabilised at $116 yesterday. This is 38% above its average level for 2010. And if the unrest spreads to the Gulf states and Saudi Arabia, the price could rise to $200 easily, CEBR said.

IB Times
If we were to see Oil at $200, where might we expect Gold and Silver to be relative to the price of Oil given similar ratios to the peak in January 1980?

The price of Silver at a ratio of 1.2 to Oil with Oil at $200 =  $240
The price of Gold at a ratio of 20.77 to Oil with Oil at $200 =  $4154

Of course Silver's peak in January 1980 was also partially the result of the Hunt Brothers attempt to corner the market, perhaps a fairer ratio to use would be that seen later in October 1980 which was a Silver/Oil ratio of .56, which would translate to a Silver price of $112 with the same ratio and Oil at $200.

Of course it's just speculation that Gold/Silver will reach exactly the same ratios as seen in 1980 or that Oil will reach $200 in the near future, however the Middle East unrest seems far from over and I think an energy crisis developing and the prices mentioned above being reached are a definite possibility.

Silver spiked and closed above $35.50 last night, a new intraday and daily close record for the current bull market. I suspect the rise that we see over short to medium term is going to absolutely blow minds, many will miss out and buy too late on the way up. The blowoff peak is likely to see an almost as shocking correction on the other side, so it is important to be ready to sell, have an exit plan and put it into action when your targets are met.

The hysteria around Gold and Silver at the peak of the mania phase  (which I  believe we are in the early stages of, Link) is likely to be intense and hard to ignore, so it's important to be mentally prepared for it. Keep your emotions at bay, keep your arms legs inside the carriage and enjoy the ride.


Disclosure: Positions held in Gold & Silver. Not investment advice. Do your own research.


  1. The central question is what to convert the "profits" to as a store of wealth to move forward in time.
    The way I see it is there are two components to the current oil price spike, the first being political, just like in the 70's. The second, and more insidious is the specter of peak oil. After the oil shocks of the 70's, cheap oil could begin to flow rapidly once the political landscape changed. I'm not sure this is going to happen this time around. In other words, a structural change could occur with the price floor now being at the Brent $100++ level. This will embed a much higher inflation rate in the cost of everything.
    Here's a good video to consider:

    So, everyone must decide if the inflation, and associated price spike in commodities & PM's will be temporary or permanent. This really depends if you consider peak oil, and therefore "peak everything" (see ) to be a valid argument or not.
    Converting a winning trade back into paper brings its own risks. Barron, what is your exit plan to cover this possible scenario?

  2. Hi BB, not sure but thought you might be interested in this. I think youre not a frequent trader but interesting to note that up and down market days loosely follow published POMO and no or low POMO days usually see a large correction. And also how much effect this manipulation has on the market with consequent commodity inflation. It's a tight rope act but they are very good at it. QEII slated to end in June-July I guess the approval of QEIII mere formality with reflation rally to continue.

  3. FX needs to be considered too, as the AUD wasn't floating in 1980. An oil shortage may significantly weaken the Aussie as the flight to safety is USD bound.

    I cannot imagine the AUD benefiting from an oil crisis. The global economy would slow, hence Australian commodities exports.

  4. Babstar, thanks for your detailed reply, I watched the video yesterday, it was very interesting. He did well predicting 3 figure oil within 15 months of the speech.

    There are several scenarios where I could see Gold/Silver specifically plateauing at a higher level without the 20 year bear market they went through following the last precious metals bull/bubble.

    Currently I am overexposed to the metals and intend on reducing this exposure as the bull market progresses, with view to hold a core position even following the bubble. So assuming that 10% of assets were kept in metals this should provide some protection to the scenario you present.

    It depends on where other assets are relative to Gold/Silvers peak when it comes, the profits may not stay in cash long. If the right conditions prevail, in my case the profits may be sunk straight into income producing assets, whether that be property, business or blue-chip shares.

    Bruce - I have noticed that over the last few months with the Middle East trouble that the USD seems to be losing its status somewhat as the "safety trade". I'm not sure whether that's just a temporary change... I do agree though an oil crisis has the potential to drag on Australia's already struggling economy.

  5. Barron, that's a good take on it. Exchange out of metals, using the currency of the day as a temporary medium of exchange for other physical assets. Timing the transition is going to risky, but that's life! Keep up your thought provoking blogging, thanks.

  6. I discussed this post and more at

    Thanks BullionBaron
    The Prince