Gold has been rising again of late.  It recently broke back though $900 an ounce, after flirting with the $830s a week or so ago.

It is not surprising.  Inflation is back in the news, and in times of trouble investors don’t let it be, instead they often plump for gold.

But there’s more.  The long-run average for the price of gold in ounces to oil in dollar per barrel is 16.  Right now the ratio is around 7, ergo the price of gold is set to shoot up.

Some have been predicting an imminent rise in the price of oil to $200, so if that is right, and the gold oil ratio returns to its historical average, gold should hit $3,200 an ounce.

Tempting isn’t it?

Just remember, gold may always glisten, but don’t be fooled into thinking it is set to glisten more than normal.

This is what Capital Economics have to say on the matter: “Gold bulls understandably like to include the period between the mid 1980s and the end of the last decade when the ratio was relatively high. But this was a period when oil prices were flat or falling, which rather undermines the argument about inflation-hedging. If we focus instead on the more recent period of sharply rising oil prices, the average gold to oil price ratio since 2002 is around 10. And if anything, this ratio seems be trending downwards, not upwards.

“What about the 1970s? The ratio of gold to oil actually fell for several years after the oil price shocks in both 1973 and 1979 (and not just for the short periods that might be dismissed as a temporary underperformance). What’s more, this was during two periods of much higher inflation than we are seeing or likely to see soon despite the undeniable upside risks.

“Finally, the assumption of a reliable long-run relationship between the price of gold and the price of oil is fundamentally flawed. There may be many good reasons why the relative price will change over time: in particular, rapidly developing economies need more oil, but they do not necessarily require more gold.”

But let’s assume the 16 ratio is right, and over the long-term gold and oil will head towards that ratio.  Oil would need to fall to $61 for the current price of gold to be right.

© Investment & Business News 2013