I created a stick figure chart on when to create the readings for creating just about any ratio based on USD gold. We need 4 major points, two highs and two lows, to get our outside extreme parameter numbers.
For the gold/gdx ratio I use 85:1, when gold stocks are extremely cheap, and then about 30:1, when gold stocks become very expensive. Contrarians use all sorts of ratios like this, because they have told me as much. Besides, I borrowed the idea from Steven Jon Kaplan the first time I heard about it.
Updated April, 1, 2018
I’m going to expand this ratio page some more, as developments in the last 3 months are critical into understanding ratios when big bear market rallies are starting to end. I keep track of about 25 sets of gold ratios and I use the futures gold price in US dollars as my base. I do not try and forecast the price of gold with any ratio I keep, and It is not important how wild the price of gold can be, at any given time I make calculations. The sampling rate is important and I need to increase my sampling rate on some ratios that I have been working.
I will use WTI crude oil as an example, but it also shows up on any asset class that is getting too expensive. At the 2008 peak I called for an oil crash based purely on the gold/oil ratio which hit about 9:1. Remember those days? Yes, the year of the great oil shortage they called Peak Oil. Experts were calling for $200-$300 oil and a $5000 gold price as well. Within 8 months the oil price crashed to about $34 and with this crash another great oil glut arrived and storage became the big issue. During the 4 year counter rally into the 2013 peak we were averaging about 20:1 before the gold/oil ratio dipped to 17:1 and then started to crash again. I thought $70 would be sufficient for a corrective bottom, but that was not even close to the $28 oil bottom we ended up with.
In 2013 experts were also calling the oil rally a bull market, but in reality, this also proved to be wrong. Crashing much lower than the 2009 bottom by early 2016, the gold/oil ratio hit an extreme of 44:1. This was the most extreme ratio in oil I have ever calculated. With that ratio I new a big bullish phase was coming, but how big of a bull market was uncertain. $60 oil provided a big potential resistance level and I was talking about $115 oil price as well. In the first 3 months of 2018 I took about 13 calculations and when I averaged those 3 months we were looking at a 21:1 ratio. The gold/oil ratio has been hitting a proverbial brick price wall, along with all of the 5 general stock indices I cover. When the ratio starts hitting a price wall, then this is a sign another bear market rally has gone far enough. Any bear market rally never keeps its price, as all bear market rallies are completely retraced.
In little over two years this oil rally has been running up against the “brick wall” ratio for 3 months now, which tells me that a big oil correction is coming, sending oil prices crashing below the 2016 lows. ($28) In other words oil sure could be in another fake bull market and we are going to find out the hard way, what another bearish decline will bring. With that decline I’m sure another oil glut will appear. At a bare minimum, crude oil would have to retrace the 2016 lows even, if it’s just by a small amount. Once we draw the top trend line from the 2008 peak to the 2013 peak, we have a falling trend line. When we join the two bottoms of 2009 and 2016, we have the shape of a huge “wedge”, or what I call a Scalene triangle. This wedge is already giving us a big clue that once this wedge has finished, another huge crude oil bull market will develop, and this time it won’t stop at $65 or even $115. A “Wedge”, Scalene triangle, and the popular Megaphone patterns are basically the same, but it depends on how we use them, that will determine their usefulness. December 2018 futures are also priced $2.98 lower for a barrel of oil than the June contract is, so even that alone does not paint a bullish oil picture for me anymore.