Relative Value - on which side of the equation?

Gold and Oil have a long-term relationship. It is marked by volatility, but it lives within a range. Gold's per-ounce price runs from a 10 to 30 mulitple of Oil's per-barrell price.

This chart from IncredibleCharts.com shows the thirty-plus year history of the gold-to-oil ratio.

As this chart ends in 2005, the next chart uses the ETF's for each commodity.

Since the gold ETF, GLD, has a 1:10 ratio to the per-ounce price, that makes the relevant range of 10:30 reduced to 1:3.

That's exactly what the range has traveled in a New-York-minute. While almost all commodities have fallen like a stone, gold has held up.

Commodities have been giving an indication of deflation during the financial crisis unwinding of massive leverage. Common sense tells a different story, seeing the Fed and US Government ready to move trillions in place to prevent a financial collapse. Caught in-between is the once weak dollar which rallied in the face of the unwinding. Now as the dollar is weakening again, that leaves the question whether gold will resume its role as a hedge to the dollar and inflation.

Regardless, the gold-to-oil ratio is historically high. Will oil or gold be the stronger relative mover to shrink the ratio. Not knowing the answer, I think buying GLL, the ultrashort gold ETF, and long USO is the best combination.


Commodities - Shocked Back to Reality

The graph shows the 1982 Dow Jones Index (blue) and the 1999 Rogers Raw Materials Index (orange).

Jim Rogers identified the impending bull market shift from equities to commodities back in 1998. He set up his own index beginning then, set to 1,000.

The indices are plotted along the current time line of the Rogers Index. The Dow Jones index is 16 years and 3 months behind the Current Time Line. The October 2008 Rogers Index aligns with June 1992 on the Dow Jones Index.

The Rogers Index fell from 5,718 to 3,138 from June 2008 to October 2008. In June 2008 the Rogers Index was advancing at a Compounded Annual Growth Rate (CAGR) of 20.5%. The dramatic 45% sell-off reduced the CAGR to 12.5%. The Dow Jones Index had a CAGR of 15.3% from 1982-2000.

So while the Commodity sell-off was dramatic enough to erase three years of gains, it is still not far off the two-decade return that equities produced. Commodities are known for volatility - and the second-half of their bull market should have some more twists and turns in the road.


Today's Market Falls in Line

Looking at this post back in July, the May 2007 to May 2008 projection was a very good outlook.


The post looked at the decade of returns following a record setting decade. The mother of all decades was the May 1988 to May 1998 period, cruising at a Compounded Annual Growth Rate (CAGR) of 16.7%. The post compared the three prior record-setting decades and subsequent decade returns. They all showed a dramatic drop off at the end of the subsequent decade.

Using the 1968-1969 returns, the last year of the subsequent decade returns, I placed a projected DOW to predict how the last year of the current subsequent decade would look. Placing this morning's low in the current week, one can see that the projection has been a great guidepost.

One can only conclude from this point some sideways consolidation and then a nice burst back to 13,000+; only to find a spring sell-off waiting after that rebound.