This is the March oil contract month, which is a bit early to use but the end result will be the same. Yes, we hit a bottom, but we may still be a bit too early for another bullish move to crank up. There still may be a little upside to go and I’m taking a chance as one more downside move can also still happen. The commercial hedgers are still net short crude oil which can keep a lid on oil prices. The speculators are the trend chasers and are building net short positions.
The Gold/Oil ratio tells us a different story as that ratio hit about 30:1 briefly in the last few weeks, but it is sitting at 28.25:1 right now. 44:1 was the last extreme bottom while 17:1 ended up being one of the extreme expensive ratios. Oil has crashed from this 17:1 ratio twice since the July 2008 peak. Our present crude oil market is 6-7 months shy of a 10-year bear market, with no signs of an impending strong 5 wave run.
When we look at the crude oil monthly chart we can see a crash, then a huge rally and then another crash into the 2016 low. This would make a great looking zigzag crash which may not be finished.
It’s a game of splitting hairs and only short-term trades may work. One thing is certain and that is if you are a crude oil follower for any reason then use the gold and oil price on a smartphone and calculate the gold/oil ratio several times a week. Using the little Forex gold and oil units works just as well. Making the calculations consistently about 2-3 times per week will get you started. After a while, you will memorize the extremes and what can happen after extremes get hit. Don’t try and forecast the price of gold this way as oil is not money, crude oil evaporates into thin air when it is burned but gold can’t be destroyed.
If some clown forecasts gold going to $5000 next year and our present gold/oil ratio is 28:1, then $5000 gold would produce a $178 oil price. Oil at $178 in 2019 is highly unlikely so you know that the gold price forecast is just a pipe dream! At the 2008 oil peak, bullish oil price forecast was being made with $200-$300 oil prices still to come. All the experts were bullish on oil at that time, yet oil imploded from $147 down to $34 in just 8 months. The Gold/Oil ratio was at 9:1 at that time and I knew that oil was going to crash.
The idea about gold ratios is that it gives us more of an objective look at the oil price and we can see through the emotions that are always present in any market.