The "gold-to-oil" ratio.
Most folks don't know about it, but there is an interesting world of trading ideas that can be termed "ratio trades". These aren't the conventional "buy a stock and hope it goes up" trades. They involve trading one asset against another asset.
For example, one of the most important ratios in this group is the "gold-to-oil" ratio.
Since they are both commodities that have intrinsic value, gold and oil can be affected by the same buying and selling pressure in the market. But their values can get "out of whack". When this happens, traders can step in to sell gold and buy oil...or buy gold and sell oil.
The profit on these trades depends on how the two assets move against each other... rather than moving in U.S. dollar terms. We used this analysis to time – almost to the day – the epic 2008 bottom in crude oil.
Over the past 10 months, the gold-to-oil ratio – meaning how many barrels of oil a trader could buy for the equivalent of one ounce of gold – has fallen from 20 to 12.
This means gold has collapsed in value relative to oil. Now, the whole world hates gold... and hedge funds hold massive short bets against it. Conversely, hedge funds hold massive long bets on crude oil. Look for "hated" gold to rally against "loved" crude oil.
January 11, 2016