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PAIR TRADING – Gold to Oil Ratio

Over the last 76 years it has taken an average 16.5 barrels of oil to buy one ounce of gold. When ever this number gets out of align, there is a chance for us to make money by pair trading gold and oil using 2x leveraged ETF’s (more on this later).

How To Use The Strategy

First thing we need to do is calculate the current average. You can use the links above to get the prices of gold and oil. Take the price of an ounce of gold and divide it by the price of one barrel of oil. That will give you today’s current average. At the time of this writing (Sept 19, 2022) the ratio is 19.5.

In the chart below is the Gold to Oil ratio since 1946.

Now that we have the current ratio and we know what the average is, here is how we monetize the gold oil ratio using pair trading.

If the current ratio is HIGHER than the average:

Oil is cheap or Gold is expensive. To go back to the average, Oil has to rise and/or Gold has to drop in price. You can buy UCO to profit when Oil rises and GLL to profit when Gold drops. Buy both and hold until the ratio goes back to average.

If the current ratio is LOWER than the average:

Oil is expensive or Gold is cheap. To go back to the average, Oil has to drop and/or Gold has to rise in price. You can buy SCO to profit when Oil drops and UGL to profit when Gold rises. Buy both and hold until the ratio goes back to average.

For those VISUAL people, here is a chart of the Oil Gold Ratio (how much Gold to buy one barrel of Oil)

Pair Trading Gold and Oil Using Options

Now that you understand how to tell which way these two commodities should move in price AND which ETF’s can be used to profit off the moves, you could step your game up and use options. One word of caution, looking at the charts above you will find these moves may take years from trough to peak. If you do use options, give them a long time frame. Minimum of 6 months. One year may be better.

If you would like to trade the ups and downs of market indexes instead of commodities like Gold and Oil, I recommend my other trading service Index Trading Strategy.