The Gold/Oil Ratio

I subscribe to a lot of investment newsletters. One of them had a reader who asked an interesting question:

You have previously shown us charts indicating that gold was cheap compared to oil. With gold now moving inversely to oil, will you make the comparison again for us?

The key to the gold/oil ratio is the number 10. An ounce of gold ought to cost more than 10 barrels of oil. When gold is less than 10 barrels of oil, something is badly wrong. Either oil is too expensive or gold is too cheap... or both.

When oil was at $140 and gold was below $800, the ratio was absurdly low – 5.7. Extremes like this are rare and they never last. Today the gold/oil ratio, at $900/$90, is back to around 10. We expect it will continue to trend higher. It typically peaks above 20. Assuming oil remains around $90, that gives you a $1,800 target for gold.

Not sure how accurate this is, but its pretty interesting nonetheless. And if you've read the latest Forbes magazine, there's an article predicting $500 oil by 2015! Would that mean gold would hit $10,000/oz?

Regardless of what happens, I'm sure golad I bought gold coins at $500/oz.