Gold/Oil Ratio Signals & Latest QE Path

by Ashraf Laidi
Oct 6, 2010 1:26 | 31 Comments

Gold/Oil Ratio Against Equities

In my September 1st piece, I argued the importance of valuing Gold relative to Silver via the Gold/Silver ratio, concluding that gold will UNDERperfom silver despite its status in the limelight. Indeed, the G/S ratio has fallen 7% since the article, hitting a new 13-month low of 59.0. My case for "faster" gains in silver remain in place.

So how about Gold/Oil ratio? Readers of my book and previous articles on the topic recall that the G/O index bears a highly negative correlation with risk appetite/stocks/market sentiment. The rationale being that when G/O ratio ceases to rise and begins to pull lower, it is a case of re-emerging energy prices relative to metals, usually reflecting improved appetite/higher growth/weak-US-based gains in energy prices. The converse case applies.

The G/O ratio is especially valuable during the early stages of a rebound as it predicts deteriorating risk appetite and falling equities (2008 example) while a peak followed by an early stage decline, usually suggests rising stocks, led by higher energy prices (April example) and May example .

With the above evidence continuing to prove effective since 2007 (time of writing my book), let us integrate it into the G/O relationship of today. The chart below shows the G/O ratio in the upper panel and the S&P500 in the lower panel. The latest correlation between S&P500 and G/O ratio on a 2-month rolling basis stands at -0.63. The red lines indicate the inverse correlation of the overall trend. Note how G/O ratio began drifting lower (due to faster oil appreciation relative to gold last week), which has been accompanied with a clear increase in the S&P500 (and other stocks). The break out of the S&P500 above 1,150, could mean further decline in G/O ratio –potentially towards the 6-month trend line support of 15.20.

Gold/Oil Ratio Signals & Latest QE Path - GOLDOILS&Amp;P500OCT5 (Chart 1)

And if the above dynamics continue i.e. further declines in G/O ratio and higher S&P500, this could well take the form of rising oil prices revisiting the $86-87 level.

Diamond in the Energy Rough

The weekly US crude oil chart below shows a rare "diamond formation", which in technical analysis is a rare pattern. Diamonds could be either continuation patterns (bullish) or reversal patterns (bearish). In this case, the weekly chart broke above the $80.50 trend line resistance last week (falling trendline line), showing a continuation out of the multi-month pattern, whose 1st half held up during Oct 2009-May 2010. The importance of last week's break out and this week's follow-through is highlighted by the break of the all-important 200-week MA. The next test emerges through a required break above $83, which is the high from Aug 2010 (small red circle). Tuesday's closing price was at $82.82 was not enough. A Friday close above $83 would be necessary, while a close above $75-76 is required to maintain the uptrend.

Gold/Oil Ratio Signals & Latest QE Path - Oilweeklyoct5 (Chart 2)

In the event that $83 is broken with a weekly close (preferably), this stands the chance of extending S&P500 towards its next resistance of 1,190 (200-week MA, which was broken in June 2008) and 11,200 on the Dow Jones Industrials Index. Is this plausible? An "upbeat" US earnings season and rising confidence that US markets will be "liquefied" by Fed asset purchases could well do the trick…for now. The implications for the USD index suggest a possible decline below the 76 trendline and into a prelim target of 74.

Bank of Japan Follows Fed into Zero, ECB Stands out as "Hero"?

Today's BoJ decision to jump back into zero interest rates along with the Fed means the ECB is left alone with 1.0% policy interest rate, a notion that is hard to resist by FX traders favouring further gains in EUR. This is especially the case as the ECB shortens the duration of available funding. Meanwhile, FRBNY pres Bill Dudley reminded us last week that additional QE is a defacto easing of fed funds rate.

Don't Confound Inadequate Liquidity with Unnecessary Liquidity

Many have wrongly stated that rising EURIBOR rates (Eurozone interbank rate) as a sign of inadequate liquidity, which is a sign of lack of confidence. But they confuse rising EUR interbank rates -- resulting from inadequate liquidity due to lack of lending & trust among banks, with rising EURIBOR – usually associated with lack of need of funds (the case today after Eurozone banks demanded less loans from ECB). Last week, Eurozone banks demanded EUR 104 bln from the ECB's 3-month liquidity operation, well below the expected EUR 150 bln. JC Trichet has expressed this as sign of less need for funding. But the unexpectedly low demand could further drive up EONIA as excess liquidity declines by an estimated EUR 80 bln. EUR 3-month LIBOR is now at hit a 15-month high of 0.89%, extending the spread over its US counterpart to 0.58 bps, the highest since Feb 2009. As long as the ECB and Eurozne banks are content with shorter marturity loan facilities and any event-risk is averted with regards to the P-I-I-G-S, euro shall remain supported at $1.33. But with my $1.3850 target been hit (see prev IMTs and tweets on twitter.com/alaidi), I need a new fundamental catalyst for a break above $1.3940.

BoJ Easing Will Not be Enough

The decision by the Bank of Japan to purchase everything in sight except for stocks reflects the desperate situation of the central bank. The BoJ slashed its policy rate from 0.1% to between 0% and 0.1%, while creating a temporary fund of about 35 trillion yen to buy various financial assets (government bonds, corporate bonds, and commercial paper). Will the BoJ buy stocks as it did 2 trillion yen worth of bank shares in 2002-3? For those who were around in 2002, remember, the BoJ included stocks in its shopping list well into mid 2003, until.. you guessed it.. it resorted to pure yen-selling intervention into March 2004. The BoJ's measures may be sufficient to prevent yen strength vs. commodity and European currencies but are unlikely to reverse the USDJPY beyond the 85 yen level.

My QE is Bigger than your QE

And if you think the 35 trillion yen announced from the BoJ is large, it is only the equivalent of about $420 billion, which is less than half the anticipated +$1.0 trillion in treasury

Comments (Showing latest 10 of 31) View All Comments
said
mulhouse, France
Posts: 2822
9 years ago
Feb 20, 2011 19:55
j'ai vu trois policier avec un pieton chez delahousse.
serait ce le actuel hasa sur iqraa presentateur avec clariden basel. reponse OUI c7

daveO
F.O with ur let do services.
catnip
Frankfurt, Germany
Posted Anonymously
9 years ago
Feb 20, 2011 19:47
after all it's not chart astrology.
This aside, the Iran warship story looks much like a Hollywood plot. Tehran says so Cairo says other Israel says these two fat lies. I prepare for some spiking turmoil in fx . Volume has been low that's how relatively small orders drove Eur up. It was definitely not frantic Eur buying.
Better be careful politically dominated fx markets are ugly.
DaveO
N.Cornwall, UK
Posts: 5733
9 years ago
Feb 20, 2011 19:21
Said, you are being ridiculous and completely ignoring Ashraf's request. You want to ruin the whole forum instead of just one room.
said
mulhouse, France
Posts: 2822
9 years ago
Feb 19, 2011 15:36
what she says again
" yes check even my father and my grandfather" what a pity people.
said
mulhouse, France
Posts: 2822
9 years ago
Feb 19, 2011 15:35
good asad short her and them the istanbul turkey herbs. Richard.

"yasser Khamoundi rums time"
asad
London, UK
Posted Anonymously
9 years ago
Feb 19, 2011 15:26
Yet another opportunity to short CL, mates...


Asad
said
France
Posted Anonymously
9 years ago
Feb 18, 2011 19:59
yoni,
leave them on the peugeot 309

ok ashraf
mais tell her that i let her find a common ground in basel and colmar on cayman island informations. so she keeps the distance from today with her haaretz newspaper that she cant even read.
Ashraf Laidi
London, UK
Posts: 0
9 years ago
Feb 18, 2011 19:39
Said, there is no need to complicate this further. It is one thing to share your knowledge in a way that is conducive to figuring out the direction of the market. It is quite another to share your knowledge to things that are not at all related. And if they are not related, then that is OK if you do it occasionally. But NOT when you do it incessantly and you ramble in codes, digits and foreign language reference to somethings that you and I well know that nobody understands.


What do you mention this: "...reorganizing process of housing barracks has its financial implications on defense budget. why cant we talk about it, it is clear and simple for who wants to make a defence survey"..

What on earth is defence survey and housing budget has to do with this.

We will continue erasing any messages that are not related to the topic of the discussions or incoherent.

Ashraf
Yoni
Turku, Finland
Posted Anonymously
9 years ago
Feb 18, 2011 19:29
Said, the comrades are coming to get you. Do not jerk off the russian mafia. Please.
It is nice to be important but it is more important to be nice.
said
mulhouse, France
Posts: 2822
9 years ago
Feb 18, 2011 19:23
ashraf
a legalframework is sustained by some financial schemes as u have been working at world bank and united nations commissions. as for not understanding, the reorganizing process of housing barracks has its financial implications on defense budget. why cant we talk about it, it is clear and simple for who wants to make a defence survey.
if i talked to you about energy mix policy in south america legal frameworks, u have worked on it before being a chief market analyst. anyway i understand this TonyG and this LCP military survey.

ok ashraf. the elements of the lisbon treaty in london and paris on european energy security is an oxford paper or a paris paper. i am just curious on LCP mayfair.