Gold and gold stocks have had a nice run recently. That has drawn quite a bit of attention to the space. Although I am still solidly bullish long term, I get nervous when sentiment becomes too positive.
I am not putting new money to work in the gold shares. However, oil and oil stocks are still unloved and under owned. With WTI at $40.bbl and everyone calling for the end of oil tremendous value exists in the space.
I also bring to your attention the gold oil ratio which has given pretty good indications when oil has a tendency to outperform. One of those times is now.
Great chart from Goehring & Rozencwajg:
Here is an explantion on what we are looking at from the G&R blog post:
As proof we live in interesting times, just consider the gold-oil ratio over the last few months. Because of the impact of COVID-19 on the global economy, the gold-oil ratio has reached the highest levels in history. For example, on April 20th 2020, an ounce of gold purchases over 400 barrels of oil – ten times the previous records reached in the depths of the Great Depression in 1933 and nine times the level reached during the panic lows of early 2016.
Despite such an incredibly wide variety of backdrops, the gold-oil ratio has spent 80% of the time between 10:1 and 30:1.
The gold-oil ratio has been a reliable indicator of when to invest in oil and when to invest in gold over the past 120 years.
Looking only when the gold-oil ratio has exceeded 30:1 (i.e., oil is cheap relative to gold), crude has returned 32% on average over the next twelve months (over four times its long-term average), while gold has returned 4% on average. Oil was lower only 13% of the time (70% less often). On average, oil outperformed gold by 28% during these periods compared with 2% normally.
Now obviously this was written back in April 2020, but it is interesting to note that the gold to oil ratio is still above 40. This means that we should continue to see outperformance from oil relative to the gold price.
I have found a very interesting oil company that is not US based. It has all of its 2020 production hedged above $60/bbl. In addition, the company has a large portion of 2021 1st quarter production hedged.
This particular company has several company maker drilling projects on the board for this year and next year. In particular offshore Guyana, which has become a hotspot of new discoveries.
Subscribers to Actionable Intelligence Alert will get this name in the August 2020 issue.
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