The gold-oil ratio

This posits how many ounces of gold it takes to buy a barrel of oil. Some analysts suggest there has been a positive price correlation between gold and crude oil for most of the time in the last five decades – meaning that when one goes up (or down) in price the other follows suit. The higher the ratio, the cheaper the oil and the greater the value and purchasing power of gold. Typically, it is seen as a measure of volatility that comes from significant political and economic events. It’s seen by some as having a predictive capability.

Source: Visual Capitalist

Gold and crude oil are intertwined; both are denominated in US Dollars, and both are sensitive to inflation. Energy prices comprise about a third of the US Consumer Price Index. Higher oil prices lead to increased inflation, dampen economic growth; the gold price goes up, as more investors buy gold to diversify out of inflation-losing assets like bonds and cash.

The gold-oil ratio is a good indicator of the health of the economy; a low ratio indicates a healthy economy; a higher ratio indicates an economy in distress. On 20th April 2020, a very stressful economic time for the world, an ounce of gold would have bought more than 400 barrels of oil – ten times the previous records reached in the depths of the Great Depression in 1933 and nine times the level reached during the panic lows of early 2016.

The gold-oil ratio tends to spend the majority of its time between 10:1 and 30:1. Since 1900 an ounce of gold has annually on average been able to buy 20 barrels of oil. So with WTI around $103 per barrel and the gold price about $1,950 an ounce, the ratio is almost 19:1, very close to the historic long-term figure. Is this a gold-buying signal or an oil-selling signal? Or maybe it’s too close to the long-term average to be a signal of anything? Whatever the case, the gold price-oil price ratio is another indicator that’s worth tracking.