HardAssetsInvestor

Written by Brad Zigler  |

June 12, 2009

The Not-So-Golden Days Of Summer

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It must be time for a summer holiday. Why's that? Because the gold/oil ratio's falling. It's sort of a trader's tradition, really: Light the barbecue grill and sell some gold.

Of course, the ratio's been tanking since February after a huge run-up. But if history is any guide, the swoon won't likely level off until the last of the Independence Day fireworks have fizzled. Right now, the ratio's aiming for the 13-to-1 level after peaking at a nearly 28x multiple.

Put another way, an ounce of gold could have bought nearly 28 barrels of oil in February. Now gold buys only half as much.

Gold/Oil Ratio

Chalk up this, and any further erosion of gold purchasing power, to two things. First and foremost, the combination of a mop-up of excess oil and brightening economic prospects.

Good grief, is it any wonder why John Q. Investor is feeling a bit more flush when Nouriel Roubini (aka "Dr. Doom") voices confidence about an imminent pullout from recession?

The oil carry trade, too, has evaporated as crude inventories are being worked off. Then there's gold.

Gold's upward momentum stalled after another assault on the metal's 2008 highs failed. The June COMEX delivery has slipped below a key retracement level and now seems to have started grinding toward its seasonal lows (see HAI's article on gold's summer seasonality, "The Season For Gold? Not Yet").

This morning's London gold fix at $950 set the stage for the COMEX day session opening off more than $5 from yesterday's settlement. Within an hour, the nearby contract slumped more than $20 to trade at $941 in New York. June gold needs a close above $953 today to salvage the market momentum that began taking prices higher in May.

A stronger dollar is affecting both the crude oil and gold markets this morning, but metal futures are held in weaker hands. Aggressive shorts could try to nudge spot metal down to the $916.50 level.

It must be time to light that barbecue, no?