Gold and crude oil prices tend to rise and fall in sympathy with one another.

There are two reasons for this:

Historically, oil purchases were paid for in gold. Even today, a sizable percentage of oil revenue ends up invested in gold. As oil prices rise, much of the increased revenue is invested as it is surplus to current needs -- and much of this surplus is invested in gold.

Rising oil prices place upward pressure on inflation. This enhances the appeal of gold because it acts as an inflation hedge.

The Gold-Oil Ratio

The easiest way to eliminate inflation is to express the two prices as a ratio.

How many barrels of oil you can buy with 10gms of gold:

Gold-Oil Ratio = Price of Gold (per 10gms.) / Price of Crude Oil (per barrel)

Eg: Gold-Oil Ratio = 28025 (per 10gms.) / 5305(per barrel) = 5.28

The gold-oil ratio can helps us to identify overbought and oversold opportunities for gold looking back to the historical prices that can be seen from the table and graph below.

Last month we have seen crude oil futures rallied more than 8% settled at $107 recovered from $98 lows on Iranian tensions on speculation of supply shortages and positive fundamentals with convincing global economic data. However the high prices and higher inventory levels pressured oil prices to trade down as global economic recovery is under way. On the other hand bullions counter had witnessed certain correction after the better start of the year in the last month. Gold lost 1.67% and failed to trade above $1800 whereas it remained choppy at the domestic front with meager loss of 0.44% backed by better economic and marriage demand in India. Looking ahead for the medium term or so as to say upcoming one month, we expect the Gold Prices to trade in the positive range and touching $1800 backed by strong safe heaven demand due to weaker Greenback.

The psychological reasons for price movement were unrest has split Libya in two - and Libya is a crude oil-producing country and a member of OPEC. Economic questions of stability in the Middle East have also sent investors back to the relative safety of gold.

Trading with Ratio:

Gold/Crude ratio is trading at 5.28 as per the last closing, the value 5.28 derives when we divide gold price with crude price but in order to trade in it we have to see the value of the contact should be same at this time of trading Eg:

As we can seen the above table in the january month the ratio was 5.14 and it has raised till 5.84 in a period of 1month as in that period gold jumped on european concern and value buying from the retail market while the fall was see in the crude oil price due to economy slow down. If suppose some one had made the position in the ratio then it would we like under:

Outlook: Ratio is trading at 5.28 a little bit pull back can be seen till 5.00-5.10 level can be seen as crude is getting support from the geo-political factor while gold stucked in the range 1700$-1800$. But overall outlook remains bullish to target once again 5.85-6.20 level in coming session.