Here to Stay

The bottom line is, $100 oil is probably here to stay. We’ll see dips where Wall Street rejoices and naysayers say “See, I told you so,” as they�ve said with every single oil dip over the past few years. But then we’ll probably see oil climb right back up again.

This reality is reinforced not just by global demand, but by the fate of the dollar, too.

A big factor driving the price of oil higher has been global demand. Therefore, if global demand slows down, some folks argue, that means energy use slows down and the price of oil could fall.

But those folks forget what also happens when energy use tails off: the printing presses kick into high gear.

In other words, if American consumers and businesses cut back enough to really put a dent in oil demand, that turn of events will set off flashing red lights in the smoky back rooms of Washington and the Federal Reserve. Those red lights will in turn keep the printing press cranking double time, flooding the system with dollars. And finally, that mass of paper dollars will keep the price of oil (and other commodities) sky-high.

Either the world keeps on truckin’ or the dollar keeps on fallin’… or both at the same time. Pretty much no matter how you slice it, high-priced oil is here to stay.

A Golden Opportunity

Now let’s get back to that gold-to-oil ratio for second.

If you think, as I do, that high-priced oil is here to stay, and that the combination of global demand and the Fed’s paper dollar printing press will keep it that way, then we can safely rule out the “oil is too expensive” option as an explanation for why the gold-to-oil ratio is so low.

That means there’s only one other explanation left… that gold at $890 per ounce has gotten too cheap relative to the price of oil.

This explanation also fits the backdrop of events. Inflation is still a serious problem, and one that is only set to get worse. Remember, once again, how the Fed has responded to every single financial crisis of the past 20 years — by printing money like mad. And remember that we still closer to the beginning of U.S. consumer woes than the end.

When the Pendulum Swings

We know that markets tend to cycle between extremes. First you see high volatility, then you see low volatility. First the pendulum swings in one direction, then it swings in the other direction, and so on.

Right now, as we pointed out earlier, the gold-to-oil ratio is near its historic lows of 6.5. A little over 10 years ago, the gold-to-oil ratio hit an extreme high of 26.

So just to hypothesize, if we saw the gold-to-oil ratio return to historic extremes — and if it happened in an environment where oil stayed above $100 per barrel — that would put the price of gold above $2,600 per ounce.

Far-fetched? I don’t think so� but you can be the judge of that.

And by the way, if you’re looking for good ways to play the precious metals — ranging from safe and conservative to highly aggressive — then you might want to subscribe to the Taipan newsletter. I have it on good authority that a special report on that very topic will be coming out soon.

Source: Checking In on the Gold to Oil Ratio

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