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Imagine going into a filling station and being asked to pay for your gasoline with gold instead of dollars. How many one-ouncers would you have to pull from your pockets to top off your tank? That's the kind of equivalency described in the gold/oil ratio. The ratio - a closely watched metric of economic prospects - reflects the price of gold expressed in number of barrels an ounce of metal can purchase. The ratio is also a beacon to gold traders that indicates the degree of overexuberance or disdain for bullion. Historically, buying opportunities for gold are flashed when the ratio turns up from a bottom. Gold selling is indicated when the ratio turns down from a top. Where you call tops and bottoms is largely a matter of personal preference based upon your time and risk horizons. From a broad perspective, the "bottom" was about six barrels per ounce, when crude's barrel price spiked over $140 in the summer of 2008. The most recent "top" came eight months later, at around 28 barrels per ounce. Presently, the ratio's at about 17-to-1 and is giving some indications it wants to go higher. Or lower, depending upon your point of view. One thing is fairly certain: The ratio's not likely to hang out at its current level very long. Pretty much all of the recent vacillations in the ratio have had more to do with the dollar price of oil than with gold's value. Gold's price has been a virtual steady state compared to oil. Wobbles in the value of petroleum have been clearly disproportionate. Stasis in the ratio would have required a two-thirds reduction in gold's value and that, for sure, didn't happen. Gold/Oil Ratio 
Oil's the bellwether for an economic recovery. Demand for fuels rise when goods and people are on the move. We've seen some niggling indications of demand rising. Witness the widening gasoline crack spreads. Still, there's a real tug-and-pull going on in the ratio. Note the recent rebound on the chart. Let's just, for the moment, paint a bleak scenario in which the ratio continues its rebound; in other words, where gold gains purchasing power relative to oil. How could you play it? You'd first need to find a short exposure to oil. You can do that in one of several ways: futures, exchange-traded notes (ETNs) or exchange-traded funds (ETFs). We can obtain some of the leverage of futures together with tight index tracking by using the PowerShares DB Crude Oil Double Short ETN (NYSE Arca: DTO), which attempts to deliver twice the inverse monthly performance of the Deutsche Bank Liquid Commodity Index's oil split. You can find an analogous long gold exposure with the PowerShares DB Gold Double Long ETN (NYSE Arca: DGP). You'd want the double-exposure ETNs because of their greater liquidity versus the single-exposure editions. Now, you could just keep things nice and simple and buy the notes 1-for-1. But this year - no surprise here - the oil ETN's been more volatile than the gold ETN. More than twice as volatile, in fact. If you think history will repeat itself, you'll need to hedge that excess volatility by purchasing two gold notes for every oil chit bought. In actuality, the year-to-date hedge ratio is 2.3-to-1, so for every 100 DTO notes, you'd buy 230 DGPs. Gold (DGP) Vs. Oil (DTO) 
Year to date, the 1-to-1 version of the ETN spread's earned a 15.8% return. If you'd done the trade with a 2.3x volatility adjustment, the return would have been a percentage point lower, but you'd have cut your risk, or standard deviation, by about 13%. And in a market like this, who couldn't afford to shave a little risk?
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great post man. keep up the good work.