Is the oil to gold ratio set to get skewed? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Is the oil to gold ratio set to get skewed? 

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In this issue:
» Should the CAG have more power?
» Will Mitt Romney's victory spell disaster for gold prices?
» Why Carlos Slim is richer than anyone in history..
» We are not ready to deal with TBTF banks
» ... and more!

----------------------------- Is the next Global Crisis closer than we think? -----------------------------

Many renowned financial experts around the world strongly believe that we are on the brink of the next Global Crisis.

And if that happens, even India may not be spared this time for reasons we both know.

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If you're serious about protecting and growing your wealth in the tough times that could lie ahead, I suggest you click here to read the letter right away...

This information is time-sensitive, literally!


00:00  Chart of the day
It is not without reason that coal is often referred to as 'black diamond'. Oil and petroleum are also often referred to as 'black gold'. After all the minerals with their productive uses often give the unproductive gold a run for its money. No doubt gold acts as a store of value and is almost irreplaceable for its inflation hedging property. But energy resources like coal and petroleum too hold the key to future growth of humanity. At least until sustainable use of non renewable energy resources become financially viable.

Having said that, the prices of commodities like oil and gold have shown peaks and troughs. The historical data for how many barrels of oil could one could buy per ounce of gold particularly throws up some interesting results. If one looks at the data for last six-odd decades, the average oil to gold ratio has been 14.7 barrels. The same has, however, touched a high of 22.9 in 1995 (post US - Iraq war) and a low of 8.9 in 2005. Thus it is the relative demand supply trade off of the two important commodities that determines the way ahead for the oil to gold ratio. The last five years have seen gold getting prominence over its productive counterpart. Particularly with excessive money supply fuelling demand for the yellow metal from worldwide investor community.

Data source:

But it seems the cost of exploring oil fields and extracting oil is set to soon skew the oil to gold ratio in favour of the former. As per Moneynews, the world's top oil and gas companies are struggling to deliver high output growth. Something that they must in order to outpace the burgeoning cost of exploration and development. In fact the recent results of oil behemoths like Exxon Mobil, Royal Dutch Shell point towards lower profitability. If that continues, companies may even refuse to spend more on exploration of new oil fields. Something that our domestic oil majors have already indicated. With that supply shortage of oil and petroleum products is a given. And we will not be surprised if the number of barrels per ounce of gold shrinks despite firmness in gold prices.

Now we do not want to speculate about which way the oil to gold ratio is headed. However, what is certain is that essential commodities, be it petroleum or agri produce, could vie for investor attention in the years ahead.

Reliance Industries (RIL), easily India's largest firm by revenues, is coming too much in the news these days. And that too mostly for the wrong reasons. The most recent piece of bad news concerns some pretty sharp differences that have come to the fore between RIL and the Comptroller and Auditor General (CAG) of India. Apparently, Reliance wants the audit of its offshore gas fields to be merely a financial audit. And not cover any other aspects of it. Secondly, Reliance does not want the audit report to be tabled in the parliament but instead be given only to the oil ministry.

Well, we believe that both these arguments rest on pretty flimsy grounds. The Government is a stakeholder in the oil fields. And hence, CAG has every right to scrutinize all the documents related to the fields and not just financial ones. Also, CAG as a constitutional body, reports directly to the parliament and not the Government. Thus, the question of not allowing the parliament an access to the audit reports just does not arise. On the contrary, this new found reluctance by Reliance only deepens the suspicion that something wrong seems to be brewing at India's largest corporate. There is no question that CAG is perfectly justified in raising objections to both the points that Reliance has raised. Thus, the sooner it gets to audit the better it will be for everyone we believe.

Do you think the CAG should have the authority to scrutinize all documents pertaining to natural resources? Share your views or you can also comment on our Facebook page / Google+ page

The three rounds of money printing or the quantitative easing did help in one thing. They helped boost the prices of most commodities. One asset class that greatly benefitted was gold. Gold prices soared to reach new highs. And as the money printing machine kept on printing more and more, prices just kept going higher. But now all eyes are turned towards one of the biggest events of this year. The US Presidential elections. The thing is that Mitt Romney, the Republican Presidential candidate, does not support the loose monetary policies of Mr Ben Bernanke. If he wins he is expected to stop the printing press. If that were to happen then the flood of money that has been boosting the prices of asset classes will vanish. And this would hurt the prices of everything, most of all of gold. No wonder that most traders and investors have opted to sit on the sideline and wait for the elections to get over. Because if the monetary policy is tightened then one thing is for sure. That in the short term prices of gold would correct. However given the overall uncertainty in the global economic environment, the long term fundamentals of gold remain intact. As a result investors would do well to hold gold as a small percentage of their portfolios. But perhaps the best time to buy would be post the elections.

One worrying trend across the global economy has been the increasing gap between the rich and the poor. The greater the divide in the income distribution, the greater is the level of social discontent. And when this discontent reaches a zenith, it triggers rebellions, violent protests which may even turn into bloody revolutions and wars. Therefore, income inequality must not be treated just like an economic statistic but a disease that ought to be cured.

But hasn't the rich-poor divide always been there? Yes, that's true. But the gulf has widened to dizzying levels. Do you know who the richest person to have ever lived is? Of course, it's impossible to compare wealth across different time periods. But one can compare a person's wealth using Adam Smith's technique - compare the annual income as a multiple of the average wage of fellow citizens. Taking this approach, the answer is Mexican business magnate Carlos Slim. His US$ 53 bn wealth is equal to that of average 400,000 Mexican citizens. That's an astounding number! Though many may tend to be in awe and admiration of such a grand tale of success, it worries us.

Moreover, this is not an exception but a trend in the current times. Even back home in India, the economy continues to be plagued with rising income inequality. Unfortunately, Indian policymakers have not shown much interest in dealing with this economic disease.

The collapse of Lehman Brothers in late 2008 was a catastrophic event as it brought major banks and financial institutions (FIs) down on their knees. This then precipitated the global financial crisis the scale and scope of which was unprecedented. So interconnected were all the FIs that the collapse of one was enough to set a chain reaction leading to major banking failures around the world. Naturally, banks and FIs have come under intense scrutiny since then. And proposals have been put forward to tone down bonuses and also break up 'too big to fail' institutions so that they become more manageable. But the key question is whether sufficient checks and risk measures have been put in place. This is to ensure that such an event does not repeat. Bundesbank board member Andreas Dombret does not think so. He opines that it is taking longer than expected to devise a plan for how to handle the failure of large, systemically relevant banks. The idea is to eventually work out a system wherein it will be possible for a bank to disappear from the market. This is without the whole system collapsing or taxpayers having to foot the bill. But this is not as simple as it seems. Indeed, we could still be quite far from a solution to this problem.

The week gone by was a favorable one for global markets. Barring Singapore (down by 0.5%), all the markets registered gains over the week with Hong Kong (up 2.6%) and China (up 2.5%) leading the gains. The gains were largely on account of a pickup in Chinese factory activity.

The US dollar witnessed 7 week high level ahead of US job data. The US markets (Dow Jones) gained 1.0% over the week, boosted by better than expected private sector employment report and ISM manufacturing reading. The European stock markets also ended the week in green despite weak manufacturing data from Germany, France, Spain and Italy reflecting Eurozone's troubles.

The Indian stock markets witnessed relatively a lackluster performance with just 0.7% gains. This can be attributed to Reserve Bank of India's (RBI) decision to keep interest rates unchanged. What further affected the sentiments was its forecast of still higher inflation and lower GDP growth.

Source: Yahoo Finance, Kitco

04:50  Weekend Investing Mantra
"In a difficult business, no sooner is one problem solved than another surfaces - never is there just one cockroach in the kitchen." - Warren Buffett

Note: Due to unavoidable circumstances, most of "today's" wrapup was written yesterday i.e. Friday. We have still tried to do our best. We hope you enjoy reading it as much as you usually do!
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9 Responses to "Is the oil to gold ratio set to get skewed?"

Parameswara Iyer

Nov 15, 2012

Dear Sirs,
It is doubtful whether the oil to gold ratio will get skewed or not.It depends on the craze for gold, viz.,counties like India,where is perpetual demand for histrical habits.
MY OWN CONCERN IS THAT [1} i AM 80 YEARS OLD AND i NEED MONEY FOR DAY TO DAY SUSTENANCE, ATLEAST MONTHLY OR QUARTERLY. I am not greedy to multiply money and die a millionaire.Will stock market give me a decently higher return than investment in Banks. I do not want to trade derivatives,in a PRESENTLY AVAILABLE STOCK MARKET[GLOBAL].CAN YOU SUGGEST STOCKS THAT WILL GROW ANNUALLY,ATLEAST,WHILE ALLOWING FOR INTERMEDIATE FALLS?



Nov 5, 2012

The CAG regularly audits defence expenditure and tables his report in the parliament. Surely RIL Natural gas details cannot be having more classified information than nations defence related matters. RIL should come clean on its gas obligations, investments and recoveries. Faster the Better!


Borkar M.R.

Nov 4, 2012

If I correctly remember, Mr.Chidambaram, in his previous Awatar of
Finance Minister wanted to create a monolith of just 4/5
banks.There was rucus of one of his close relative connected to FII
n eventually the proposal died. I shudder with the thought "what
would have happened to MY Bharat if that proposal was implemented.
This is how, even though we say "even GOD cannot save this country,
GETS SAVED". - Borkar


Raghvinder Joshi

Nov 4, 2012

I reached here wanting to answer the question Should CAG be allowed to Audit RIL?

My answer is Yes.

Against gold, I Do not know, but over a period of time, Petroleum products prices will keep going up as we are not reducing demand and the supply is limited.



Nov 3, 2012

When govt invests money its utilisation needs to be looked into by CAG



Nov 3, 2012

CAG has been often criticised that it is overstepping its mandate. Supreme Court came to its rescue , maintaining that CAG is not a munimji. Many instances have come to fore in corporate and government sector where the balance sheets are up to mark and they they have passed scrutiny of auditors, I-tax official but many unsurcuplous practices remain hidden. Therefore CAG mandate should be amended to dig out any type of underhand deal or any misuse of power and tweaking rules in a wrong fashion


Naushad Patel

Nov 3, 2012

What nonsense. If the government (IE you and I) has made a capital investment in the venture, then of course CAG has the right to inspect ALL documents and if necc, place it before parliament.
Looks like the likes of RIL are morally unable to run an above-board business open to scrutiny!


sharad sharda

Nov 3, 2012

Definitely CAG should have full authority and liberty too to scrutinize entire records relating to natural resources. And Reliance being an auditee, if has not done anything wrong, should have no issue to raise objection for any audit by CAG. It should rather offer voluntarily itself for audit so true picture can come on surface of the country which will ultimately increase its reputation multi-fold.

Like (1)

Umesh Sharma

Nov 3, 2012

All said and done CAG is the watchdog for the financial accountability of the government and makes is behave.However while it does post fact finding and giving more powers to GAG is certainly welcome,What we should have is a concurrent audit of the major ministries to ensure that they do not misuse their powers to put the country to irreparable loss or use it to further their personal gains at the cost of the country.Having said that it is difficult of find persons who will not misuse the power invested in them to their own advantage.Otherwise the persons working in various ministries particularly at higher levels can add their mite for the cause of the nation by ensuring that national resources are used at best for the good of the nation and its people.Unfortunately to day every one has his price and it is not difficult to compromise their integrity by offering suitable reward.That is the real tragedy

Like (1)
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