MUMBAI: When crude prices are falling, can gold be far behind? Gold breached its short-term resistance level of $600 per ounce on October 30, and has been inching closer to the long-term resistance level of $630 per ounce. On the face of it, this upswing may seem illogical to many since crude (Brent) has receded from its record-high levels to settle well under $60 per barrel.
However, if the gold-crude equation over the past is anything to go by, at these levels, gold is still undervalued by a whopping $233 per ounce.
According to researcher Adam Hamilton of the Zeal Intelligence Newsletter, gold has traded at an average of 15.3 times the price of crude per barrel for the 40-year-period beginning 1965. During the period, this ratio has touched highs and lows of 33 and 6.6, respectively.
Going by this equation, gold should sooner or later be trading around $857 per ounce since crude (WTI) is now hovering around $56 a barrel (gold price=crude price x 15.3), while gold is now quoting at $624.10 per ounce, just 10.76 times the price of crude. So, why are gold prices short of their ought-to-be levels?
Technically, gold prices are apparently not in a bullish phase.
Prices are almost 14.2% lower from their May high of $ 727.28 per barrel. So, is gold going to play a catch-up game from now?
According to analysts tracking the yellow metal, gold is set for a mean reversal. In other words, it could advance to a price that is 15.3 times the price of crude. But this need not mean gold prices should go up to $857 per ounce (to trade at 15.3 times the price of crude), since market experts feel crude is a bit overvalued. However, they expect gold to relatively outperform crude in the long-term.
“The ratio says that you can pick up gold rather than crude if you intend to stay invested for over a year. The gold-crude ratio comparison says that one is overvalued while the other is undervalued. We feel crude is a bit overvalued. Now even if crude falls, gold would still have to move up at a faster pace to equal the mean ratio of 15.3,” says SI Kannan, commodity analyst of Sharekhan Commodities.
Nevertheless, the global investment climate and price determinants have undergone a sea change, of late. The conventional fundamentals and correlative factors no more play the major role they used to. The major price determining factor now is liquidity, says Gnanasekar T, director of Commtrendz, adding that liquidity has started chasing gold.
“Though there is some scope for correlation-based studies to forecast prices, investment and related factors are playing a major role in determining prices. Further, funds, especially pension funds, which were very shy of commodities till now, have started showing interest in gold. And with the kind of investments these funds bring in, it has the potential to lift gold prices by a couple of hundred dollars,” he says.
After lagging behind crude prices for quite a while, gold had rallied to hit an all-time high of $850 per ounce in the late 1970s. At today’s levels, even if a mean-reversal is ruled out, the precious metal seems to be well poised for scaling higher.
