The Gold-Oil Ratio
The gold-oil ratio is a method used to determine the value of one commodity, priced in terms of the other. Simply put, the ratio determines how many barrels of oil can be purchased by one ounce of gold.
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The gold-oil ratio is a method used to determine the value of one commodity, priced in terms of the other. Simply put, the ratio determines how many barrels of oil can be purchased by one ounce of gold.
Read more
The Gold-Oil Ratio, What Is It Telling Us?The gold-oil ratio is a method used to determine the value of one commodity, priced in terms of the other. Simply put, the ratio determines how many barrels of oil can be purchased by one ounce of gold. Historically, the gold-oil ratio holds a 16:1 long-term average. However, In April 2020, (just as lockdown was starting) the gold-oil ratio reached its highest level ever observed. The ratio reached 91:1 as depicted in the graph. Gold was $1820 and oil was $20. |
The gold-oil ratio is a good indicator of the health of the economy, a low ratio indicates a healthy economy; whereas, a higher ratio indicates an economy in distress. Furthermore, it is also recognised as a measure of the volatility that comes from significant political and economic events. Thus, it is evident that the COVID-19 pandemic increased the volatility in the financial market tremendously.
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High oil prices tend to be associated with higher rates of inflation and lower periods of economic growth. With gold being a popular hedge against inflation, there should be a degree of correlation in any price movements. Historically, the gold-oil ratio has been a reliable indicator of when to invest in oil and when to invest in gold. The lack of a tight correlation between the price of oil and gold, is what makes the gold-oil ratio meaningful. As South Africans, we can only really invest in Sasol, which is primarily a chemical company, with a fuel section. The share price has soared as the oil price has risen. In order for the gold-oil ratio to return to its historic average, oil prices had to rally by (roughly) 590%. |
Today, at the time of writing, would you believe it, it is spot on with its long term ratio? gold is at $1 867/oz and oil at $118/barrel. As such the gold-oil ratio is 16. The bottom line here is that oil was considered cheap relative to gold, it surely was. History is always our guide.
My comment Supply and demand could drive oil prices still much higher. My view is that we will see the price of gold and oil rise in sync for a while, especially while the world is facing rapidly rising inflation and the uncertainty of a dragged out war in Asia. Nonetheless, oil has had its run, I am now expecting much much higher gold prices. |