Today we take a very long-term look at the relative valuation of integrated oil-related shares in comparison to gold shares ($XOI/$HUI). After the very long rise in gold shares in both absolute and relative terms; we find the present time is opportune to prune back long gold holdings and buy into integrated oil shares at current levels. This certainly isn't a popular decision given many are ‘gold bugs', but the fact of the matter is that this investment allocation merits strong consideration; for given when the Fed raises interest rates....they generally go too far and gold shares do quite poorly.
However, the technical picture is looking up. The ratio simply shows how ‘beat up' oil-related shares are to gold – losing nearly 80% since their 2000 high, but prices formed an absolute low in late-2003 followed by a successful test of the 50-week moving average. This, coupled with momentum turning higher from oversold levels suggests that the recent decline in integrated oil shares is an opportunity to buy oil related shares as a multi-year advance in both absolute as well as relative terms appears underway. If the ratio simply retraces back to its 200-week moving average, we would do very well. But if 50% of its decline is retraced...they we will have done enormously well.
