Mexico’s proposed higher mining royalties could block nearly $7bn in investments
The Mexican government proposed raising mining royalties under the argument that metal prices have risen in recent years.
In late afternoon trade in New York on Monday gold for April delivery jumped to $1,130 an ounce, a 3-month high and up 7.5% from multi-year lows hit mid-December.
In contrast the price of oil plummeted 6.4% to $31.47 a barrel, wiping out a good chunk of last week’s gain as crude continues its rollercoaster ride at more than decade lows.
Gold and oil usually rise and fall in tandem. Conventional wisdom is that rising oil prices push up inflation increasing demand for gold as a hedge.
Since 1970 the average ratio – how many barrels of oil can be bought with one ounce of gold – is around 15.
The same thing happened in 1980 when a record gold price in inflation adjusted terms again coincided with a sharp rise in the price of oil
From an average of 33.2 in January, today the ratio climbed to nearly 36:1, levels not seen even at the height of the oil crisis in 1973 (in June that year an ounce of gold got you 33.8 barrels).
At the time both crude and gold were becoming more expensive. Oil averaged $4.75 a barrel in 1973 and gold $97 an ounce. In 1974 oil prices averaged nearly twice that and gold went for $154 an ounce.
The same thing happened at the end of the decade when a record gold price in inflation adjusted terms again coincided with a sharp rise in the price of oil (like today, Iranian oil was a significant factor influencing the oil price). Oil averaged $37.40 in 1980, a price only exceeded 24 years later.
Today the relationship between the gold and oil is probably more a function of the dramatic slide in crude rather than the strength of the gold price.
Then again few believe gold or oil are grossly overvalued at current prices so another rise in tandem may not be that farfetched.
Click here for more graphs from Macrotrends.
Image Wikipedia: The Shah of Iran opens the facilities of International Naval Oil Company of Iran in 1970.
5 Comments
Charles Ryder
Have you only just noticed? Is it gold that is overvalued or oil that is undervalued or some underlying unacknowledged malaise in the world economy such as deflation? It’s only QE (and negative interest rates) with the constant pumping in of liquidity that is stopping the markets from sinking and ask yourself why all this printing of money has not led to inflation and why the low oil price has not stimulated greater growth in the world economy.
Air1
Silver is usually a byproduct of base mining and Gold mining. It’s ratio is 17/18-1 of Gold for rarity. So, either it’s value is very low, or Gold is much too high. However, since grade is everything, extracting Gold in poor grade mines is closer to 1000.00/ounce and since good grade mines are on the decline … how do you value Gold ? The Golden question …. 🙂
CanuckleDragger
The Fed can’t let gold rise as it would devalue the US dollar. No country with a 17 trillion dollar debt should have a strong dollar. It’s a ponzi scheme.
WWW.LOMIKO.COM
Forget about Virtual Reality – current economic situation looks like a Salvador Dali painting – Surreal Reality here we come.
silsash
The gold/oil ratio may be out of whack, but it’s unlikely to correct (or revert to the mean as some might say). Since the world seems paralysed to slow down the supply of oil, the price can only go down further. And as the economy degrades furthers, money will transfer from falling stocks into safe havens such as gold, thereby pushing PM prices such as gold higher. This out of whack chart, is only going to get more… “whacker”.