What is gold to crude oil ratio?
It simply means that how many barrels of oil can be bought in one ounce of gold at any time. What this ratio infers is that when the current ratio is below 15.4, gold is either too cheap or oil is too expensive. When ratio is above 15.4, oil is too cheap or gold is too expensive
How to use gold to oil ratio
- Every time gold /oil ratio finds a new top, crude oil changes the trend from positive to negative.
- Every time gold/oil ratio finds a new bottom crude oil chances the trend from negative to positive.
Effect on Indian market or Indian economy
Gold/oil ratio always tries to move towards 15.4 after a high or after a bottom so to maintain the ratio either oil prices will have to move upside or gold prices will have to move downside.
Relation between nifty and ratio
A scan of 22 year of data shows that nifty has a low degree of correlation (0.27) with the gold to oil ratio. But look a little closer say, at times where oil has been costly (above USD 90 a barrel) and gold has been cheep (USD 60) and gold moderate, the correlation is more than -0.5,which is considered moderate to strong. Through 2008 when market was roiled by the financial crisis, the ratio rose with the correlation, a strong -0.6. in other words, the data suggest that in periods where certain conditions obtains, if the gold to oil ratio falls, there is strong chance that share prices will increase.
Current data Gold/oil =25.71
From the ratio it is seen that either gold is too expensive or oil is too cheap In the event nothing unwanted happened that was likely because the ratio was skewed by an artificially low oil price (willfully high Saudi output and return of Iran to the market).
We have collected some past crisis measured by gold to oil ratio. During these crises few strong economies performed well because they change their fundamentals to best suitable for economy. So it is possible for any individual economy to perform based on fundamentals.
|Latin American crises||1980||29-30|
|Asian fx crisis||1997||30-32|
|European sovereign debt crisis||2011||24-25|
History shows that it is not necessary for Indian market to drag in every financial crisis as Indian government is working to develop strong fundamentals for the economy as The European sovereign debt crisis in 2011 triggered an -18% correction, but the S&P 500 finished +15% higher on the year. The same thing happened in 1998 when the Asian currency crisis led to a significant decline, but the US market finished the year +27% higher.
Policies of Indian government towards economy
- Goods and Services Tax
- Jan Dhan Accounts
Because of strong policies Indian economy is growing at faster speed and increase in FDI by 37% in June is just a begging of story of world’s fastest growing economy and world’s next big economy.
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