Many of our readers asked me why Gold is so important than the local currency. I will explain this by giving example of Zimbabwe, where inflation is over 1,000,000%. Such a high inflation has led to the devaluation of its currency to such an extent that its value is nothing. You can not even buy a loaf of bread for 500 Million Zimbabwe dollars. Yeah they recently issued a 500 Million dollar note!! So if a person has to buy something in global market he or she will get nothing because the value of his or her country’s currency is almost zero! Hence, no sane person will accept his currency which is getting depleted with every passing second. But if the same person buys anything in global market by selling his or her gold deposits, he or she will get the equivalent price of gold in US dollars or for that matter equivalent amount in any other good currency (Rs, ₤, €, ¥). Thus, gold is a universal currency traded and accepted everywhere irrespective of local or national economy. Also, the value of gold is preserved even in Zimbabwe.
Relationship between Gold and Oil
Oil and gold are arguably the most important commodities on the planet today and the ratio of their nominal prices is far from a trivial issue. The gold/oil ratio expresses the interrelationship between the commodity that forms the foundation of our entire global economy and the commodity that has been the ultimate form of money for six millennia of human history. Gold and oil prices tend to rise and fall in sympathy with one another. There are two reasons for this:
1. Historically, oil purchases were paid for in gold. Even today, a sizable percentage of oil revenue ends up invested in gold. As oil prices rise, much of the increased revenue is invested as it is surplus to current needs and much of this surplus is invested in gold or other hard assets.
2. Rising oil prices place upward pressure on inflation. This enhances the appeal of gold because it acts as an inflation hedge. With the rising interest rates the real return on bank deposits or saving becomes negligible. Hence, most of the central banks across the world put their money in gold to stop the devaluation of their reserves.
In the above figure, we can see that when the red line representing oil crosses the yellow line representing gold, the ratio is approximately 10:1. Historically, it has been between 10 and 12 in a short term period while it touches 14 in long term. Both these prices generally move in tandem reflecting the complex nature of their relationship.
Gold-to-Oil Ratio
This ratio measures “how many barrels of oil one can buy with an ounce of gold” and is calculated as:
Gold-Oil Ratio = Price of Gold (per oz.) / Price of Crude Oil (per barrel)
The gold-oil ratio helps us to identify overbought and oversold opportunities for gold. The gold oil ratio expresses the interrelationship between the commodity that forms the foundation of our entire global economy and the commodity that has been the ultimate form of money for six thousand years of human history.
Table below shows the average Gold-to-Oil ratio for the last year (monthly breakup data). We can see that the fall in oil price was much steeper than that of gold. Hence, the ratio actually increased after July 2008 and surpassed historical average of 14 in November. The last three year average for this ratio was about 17. Does this mean gold is trading at its highest price level? Analysts disagree to it simply because the ratio is more of a long-term gauge and not on a month to month, year to year trend. Near-term price direction is difficult to predict trading the ratio.
Source : http://www.indianmoney.com/article-display.php?cat_id=1&sub_id=18&aid=144&ahead=Gold%2520-%2520Investment%2520Strategies
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