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Oil and Electric Cars

This is what I thought at the end of January this year when I carried out my annual look at historic price ratios between 'the big four' consisting of UK property, the FTSE 100, gold and oil.

'Buy oil. Go on the exchanges and buy it at £10 per point, or whatever you can afford to invest (gamble) with'.

The slightly quieter voice in my head (there are many in there) told me to short gold in exactly the same way. Why? Well the historic (past 15 years) ratio between gold and oil is 14.7, which means you usually need 14.7 barrels of oil (Brent Crude) to buy 1 ounce of gold. Thanks to the collapse in the oil price the ratio had soared to a 15-year high of 31.6 at the end of January this year.

These historical ratios nearly always revert to mean in the medium term but considering that gold was still much cheaper than five years earlier, I followed my gut feeling, which was to ignore gold and just buy oil. While I made a healthy profit, I closed the trade too early, more than halving my potential profit…a classic mistake by a rookie commodity investor!

The price of gold proceeded to jump from $1,118 to $1,244 at the time of writing (21st of March), representing a rise of 11.3% in just seven weeks, but the price of oil soared by 18.5% during the same period, from $35.42 to $41.96.

At the time of writing the oil/gold ratio had dropped slightly to 29.7. 'Buy oil and short gold' (there are those voices again). But wait. When investing you can use ratios and indicators to make your decisions until you go cross-eyed, or take advice from 'experts', but in the end you should always follow your gut feeling. And, while the historic ratios suggest it is time to buy oil and hold it until it costs $80-85 again, there are a number of 'game changers' impacting the oil industry right now that make it hard to go long on the oil price with a great deal of confidence.

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