Balancing gold and oil: Part 2

I was backed by historic levels of the GOR.

In the last three decades, the GOR barely showed a value under 10, nor a value above 30. And more often this ratio bounced off a level of 20.

The starting position of thinking was that it could be expected that historic trends can also prove valid for the future. In other words, that 'extreme' highs and lows sooner or later will reverse to the historic mean. This meant that in March there a good chance was that oil would outperform gold.

Four months later, gold is trading at around $908 and oil is trading around $62 leaving us a ratio of 14.6, showing that the GOR fell as expected.

It is difficult to say whether the drop will continue or the GOR will recover again. In the latter case, gold will outperform oil.

Oil prices have risen since March on expectations that the worst of the global recession would be soon be over. In the past few weeks, investors have cashed in on some of that profit.

The main question is whether that rally will pick up again soon. Oil and precious metals have also recently been increasingly sold because of fear that the world economy will be stronger than previously expected. Maybe investors were too optimistic.

In order to assess a position, an investor should form an opinion on the relative performance of gold versus oil. If an investor expects that oil will drop further, and more steeply than gold, it would be wise to reverse position: To buy gold and to sell oil.

Keep in mind however that the GOR could even drop further: In 2008 this ratio showed a value of 6. In this case, investors currently being long oil and short gold, can sit tight on their investments.