Gold Prices-- Corn and Crude

The above image is a monthly chart of the gold to crude ratio and the gold to corn ratio. As you see on the right side of the chart, gold is historically expensive relative to these other commodities. When this ratio corrects as history depicts, will the grains hold steady and gold fall tumble? Perhaps corn and crude will rise at the same time as gold falls. I do not have the answer but it is interesting to study and may be the seed of a trade.

It currently takes 20 barrels of oil to buy 1 ounce of gold where the 12 month moving average is 12 barrels of oil to 1 ounce of gold. With respect to corn, it takes 256 bushels of corn to buy 1 ounce of gold. The 12 month moving average is 191 bushels of corn to buy 1 ounce of gold. As I study a chart from 1975 forward, never has the ratio held at these high levels for long.

The point here is that the excesses of last summer's grain market and the fear in the financial markets have once again pushed this ratio into an extreme. This is long term friendly to base commodities and not so friendly to the price of gold. A very related topic that I could have discussed was our dollar into multi year highs while yields on treasuries are at multi year lows. We are at extemes in many of these markets and excesses do not last forever.

In light of our government's mandate to reinflate our economy and spend our way into prosperity, large issuance of debt is a certainty and the bond market is telling us that yields may have to go higher in order to attract buyers in size. This drives bond prices lower and interest rates higher, not exactly what a failing economy needs.

The PA grain markets are very stable, corn basis remains strong in light of a weak futures market. I see this trend remaining in place until we get a short covering bounce that will get the augers turning again. Bean basis is strengthening as demand remains steady and farmer sales are very slow. Wheat is dreadfully boring, limited pricing by the flour mills and farmers are still in a holding pattern. Generally speaking, the market at large is a little more active than Feb, but people are still paralyzed by the volatility and the extremes in the market. Too many people do not have confidence in the future to do much of anything and this is exactly why our economy and our markets continues to falter. Opportunities are born out of chaos and extremes, the challenge is to find them and have the confidence to act reminding ourselves to check our emotions at the door.

Thank you for reading and please feel free to respond back on this forum or send me a private message at jon@keystonecommodities.com. I look forward to hearing your thoughts, interests, arguments, and comments. You can also reach me at 8773434278

Good luck,

Jon Hart