Musings

Can Gold prices reach $ 1200 per ounce? Will Oil touch $200 a barrel? These were questions I had put forward in an article “Oh! My God “published on 22 August 2008.   The GOD I refer to is Gold, Oil and Dollar. The less we speak about the last one, the better.

Gold was then at US$ 825 per ounce and oil was about US$ 120 per barrel. So going by the standard historical ratio of 15:1 (15 barrels per ounce of gold) gold seemed to be very much under priced then and therefore had an opportunity to surge in its anxiety to keep a correlation. So I had suggested that Gold prices can go north when confidence levels fall and prospects of real economic growth are bleak.This is now real.

The old correlation that stood the test of time for a long time was broken. The 15: 1 ratio (15 barrels per ounce of gold) that stood for long, was broken when oil touched $55 plus when this ratio fell down and was considered to be at its lowest at 7.5 :1. When oil prices were hovering at $125 per barrel, this ratio was at an all time low of about 6.6:1.
Some of the old tranquillity and predictability that existed in the relationship between gold and oil that was maintained for over 50 years seems to be coming back.  Today Gold has breached the US$ 1200 mark for an ounce while oil is touching US$ 80 a barrel compared to what it was at an all time high of US$ 145 a barrel. The magic ratio of 15:1 has returned once again after more than 50 years and hopefully it will stay in that region.

Much of financial woes of today’s world are singularly attributed to the sky rocketing prices of crude oil. It reached an all time high of US$ 145 a barrel last year. Some eminent economists believe that the root cause of all the problems that wiped out many livelihoods and made nations bankrupt were unbridled oil prices controlled by a powerful cartel. If oil goes back to more than one hundred dollars a barrel, then the now healing wounds of the financials world can erupt into terminal financial gangrene.

Will anyone regulate the price of oil to be below one hundred dollars?  The cartels are hibernating because if they make the wrong move, they will get hurt. With decreasing oil supply and increasing demands, It is predicted that oil peak would most certainly be achieved by 2020  (Association for the Study of Peak Oil and Gas) when it becomes increasingly more expensive to extract that extra barrel of oil. Is that why Warren Buffet has bought a major stake in the decrepit US Railroad system? Preparing for days when oil shortage will drive people to the rail road ! Anything can happen. Gold can also tumble to eight hundred dollars (in 2005 it was close to US$450 an ounce !!) when people accept realities and reduce the pace of growth.

(1 troy ounce = 31.1034768 grams)