Friday, June 19, 2009
One of the appeals of gold is that it maintains its purchasing power over long periods, even though its price in real terms (see chart in preceding post) can vary significantly at times. Some gold-standard advocates say that gold should be the reference point for all things, since it is a forward-looking indicator of the dollar's purchasing power. (A rising gold price means the dollar is likely to lose value in the future as the prices of all things rise—a process otherwise known as inflation.)
This chart is an example of using gold to measure the value of oil. The chart is simply the price of a barrel of oil (Arab Light, in this case) divided by the dollar cost of one ounce of gold. In short, the chart shows how many barrels of oil one ounce of gold will buy. Once again we have what looks like a mean-reverting process, with the average "price" of an ounce of gold being 18 barrels of oil. When an ounce of gold buys less than 18 barrels of oil, oil is expensive relative to gold, and when it is more than 18 barrels of oil, oil is cheap relative to gold. Right now oil seems somewhat expensive (oil has risen from $40/bbl at the end of last year to just over $70 today, while gold has only risen from $882 to $935).
I'm not trying to draw any conclusions from this, just throwing it out for possible discussion.
Posted by Scott Grannis at 10:22 AM