of oil (e.g., eight barrels of oil per ounce of gold), oil is overpriced and it is an
indicator to sell the oil to avoid participating in a bubble. On the other hand,
if the price of oil is low and pierces the lower level of the envelope at
0.06 ounces of gold per barrel of oil (e.g., 17 barrels of oil per ounce of gold),
it is an indicator to buy (go long on) oil. It is very interesting to note that
spikes in the oil price in terms of gold reflect political and economic changes
that occurred over the course of history. For example, before the first oil shock
in 1973, the value of oil spiked from 10 barrels per ounce of gold to approxi-
mately 35 barrels per ounce of gold, creating hugely undervalued oil and
prompting higher demand—which later created a great supply shortfall, lead-
ing to the increase in oil price from $2.50 per barrel to approximately $12 per
barrel. Looking into the history of thisperiod, one sees that this was the time
when most of the oil-producing countries were renegotiating their oil pro-
duction participation agreements to increase their share of the production and
hence reduce the share that would go to the oil companies. This situation
created the incentive, on the part of the producing oil companies, to pro-
duce as much oil as possible in the shortest time available, flooding the mar-
kets with oil and later creating a supply shortfall that nudged oil prices higher.
It is interesting to note the clear indication of a bubble during major world
events.
EXHIBIT 5.11 Price of oil in ounces of gold.
116 THE ART OF ISLAMIC BANKING AND FINANCE