If You Missed Last Week's Gold Rally, Don't Miss This
By Jeff Clark
January 27, 2009

The recent rally in gold is most bullish for oil.

Gold is up over $100 in the past six trading days. It has been a great rally, but it happened so fast it left a lot of gold bugs in the dust. Folks who were waiting to buy on a pullback had a small opportunity to jump into the trade. But if they didn't act fast, the opportunity disappeared.

Back on January 6, I wrote, "2009 will be the year of precious metals." And I suggested buying gold if it dropped down anywhere near $800 per ounce. On January 15, gold traded as low as $801.50 and we had a shot at buying it.

The shiny yellow metal exploded $40 higher the next day. Anyone with a quick trigger finger was sitting on fast gains that grew larger over the next week.

But if you missed the chance to buy gold down near $800 per ounce, you probably shouldn't pull the trigger on it now at over $900. Gold is enormously volatile, and fast gains are often followed by quick pullbacks. So perhaps we'll have a better buying opportunity sometime in the next few weeks.

In the meantime, though, you need to buy oil.

A few weeks ago, I turned bullish on oil. The trade hasn't made much headway since then, but gold's recent rally pushed oil to its cheapest level in 10 years.

You see, gold and oil often trade together. They both rally at the same time and they both decline at the same time. Historically, it takes between 10 and 12 barrels of oil to buy one ounce of gold. Whenever the ratio expands outside that range, there's a trading opportunity.

For example, back in July, when oil was trading above $140 per barrel and gold was $925 an ounce, the ratio of gold to oil was under seven. In other words, it only took seven barrels of oil to buy an ounce of gold, so oil was expensive relative to gold. As I told Growth Stock Wire readers (here and here), that was a good time to take profits in oil or even set up short positions in the sector.

Today, we have the opposite condition. Oil is cheap relative to gold. Take a look...

This is a long-term chart of the ratio of the price of gold to oil. Currently, it takes 20 barrels of oil to buy one ounce of gold. That's nearly twice the historical average and it's the cheapest oil has been in 10 years.

How to Make a Lot of Money Trading Oil This Summer Read This Before You Buy Gold

The last time the ratio was this high, back in 1999, oil quadrupled from $10 per barrel to over $40 in just one year. A similar move this time will generate big gains for anyone willing to buck the trend and buy oil today.

So if you missed the shot at buying gold near $800 per ounce last week, then don't miss your shot at oil right now.

Best regards and good trading,

Jeff Clark

Editor's note: A regular contributor to Growth Stock Wire, Jeff Clark shows his readers where to find the best stock, currency, and precious-metals trades in the market.

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