Dollar, oil wallop gold price

Frik Els | December 22, 2014 | 9:21 pm Precious Metals Gold

Gold price weakens sharply into holiday season as gold-oil ratio hits highest since February 2009

Gold suffered a sharp retreat on Monday after a fresh slide in the price of oil and jump in the value of the US dollar to nearly nine-year highs.

In late afternoon trade on the Comex division of the New York Mercantile Exchange gold for February delivery was changing hands for $1,171.00 an ounce, down $25.00 or 2.1% from Friday’s close and at the lows for the day.

The US dollar enjoyed another solid day on Monday advancing to its highest level against the currencies of America’s major trading partners since January 31, 2006. The greenback has strengthened 11% in 2014 against a basket of currencies, with almost all the gains coming since August.

Gold and the dollar usually move in opposite directions.

After gains earlier in the day in after hours trade crude oil slipped again with the US benchmark West Texas Intermediate dipping to $55.30 a barrel, a loss of more than 3% after top producer Saudi Arabia said it may increase production.

Gold and oil usually rise and fall in tandem – rising oil prices pushes 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 15.

After trading between 12 and 13 for more than a year, the ratio has now shot up to more than 21 which suggests that gold is overvalued compared to oil.

The ratio last climbed above 20 in February 2009, when gold was trading around $1,400 an ounce.

When gold hit a peak above $1,900 in September 2011, the ratio topped out at 20.5 before dropping all the way down to 15 before the end of that year.

In the months before the Lehman brother collapse of September 2008, an ounce of gold bought fewer than seven barrels of oil.

Another factor that adds pressure to the gold price is a fresh climb in US equities with the Dow Jones enjoying triple digit gains on Monday and the broader S&P500 index closing in on yet another all-time high.