We first started suggesting that you invest in gold a good four years ago, so anyone who has been reading for that long should have made a nice return by now. However, we remain convinced that the great gold bull market has only just begun. We’ve noted before that gold is the best insurance money can buy. The sceptics can call it a “barbarous relic” as loudly and as often as they like, but they can’t deny that every time there is a global crisis, or the threat of one, the gold price rises: it’s the world’s back-up reserve currency and, with both the euro and the dollar looking increasingly ropey, it may not be that long before it moves off the bench and back into the limelight. See our cover story, where we also look at the fundamental case for gold. Demand is rising and supply is tight, so whether you believe in gold as a currency or not, there is still good reason to consider it as an investment.
For those who still aren’t convinced, I would point to the gold/oil ratio (or the GOR). There has been a clear relationship between the market price of gold and the market price of oil for the last 60 odd years, with the ratio moving in a well-defined range around an average of 15.4 times: as one goes, so goes the other. There have been a few exceptions to this. Back in the mid-1970s, as the oil price soared, the ratio fell to a historical low of just over eight times. At that point there were only a few things that could happen: gold could soar in price, oil could plunge in price, or the relationship could break down. In the event, gold soared 1,800% and the ratio returned to its historical range.
Today, the ratio is horribly out of whack again. With gold at $470 and oil at $67, the ratio is now not far off seven times – ie, it only costs seven barrels of oil to buy an ounce of gold. So what will happen this time? It is highly unlikely that the oil price will collapse. We’ve written many times in these pages about the huge and rising demand for oil and about the supply constraints that make it so very hard to meet: the oil price may not move in a straight line, but its general trend is up.
So perhaps the ratio will break down? Again, it’s possible, but unlikely – such solid relationships don’t break down easily. So if you believe that in time most things revert to the mean, as we do, you’ll expect, again as we do, the gold price to rise substantially. It started moving a good few years ago, but to get things back in line it’s got an awful lot further to go – particularly if the oil price keeps rising. On page 24 we look at the various different ways you can get exposure to this – potentially exciting – bull market.