Historically, the gold:oil (WTIC) ratio has averaged between 10:1 and 30:1 and has been a reliable indicator of when to invest in oil and when to invest in gold over the past 120 years. So what is it saying these days?
By: Lorimer Wilson, Managing Editor of munKNEE.com
The gold:oil (WTIC) ratio tells us how many barrels of West Texas Intermediate Crude (WTIC) are needed to buy one troy ounce of gold, serving as a price-based indicator of the relative value of these two important assets.
Traditional investing mantra tells says that gold appreciates in price during tumultuous economic and financial times and it did just that with the advent of COVID-19, jumping from $1,550 per troy ounce (ozt.) in January 2020 to $2,070/ozt. (+33.5%) in August 2020 at the height of the pandemic before declining 14% to its current $1,775/ozt. as the third wave of infections slowly dissipated.
Conversely, a slowdown in economic activity resulting from the COVID-19 pandemic caused the price per barrel of WTIC to crater by 81.7% from $63.27 in early January 2020 to just $11.57 before rebounding by a whopping 530% to its current $72.85.
The resultant Gold:WTIC Ratio over that time period is illustrated in the chart below:
Whenever the gold:oil ratio has exceeded 30:1 (i.e., oil is cheap relative to gold), crude oil has returned 32%, on average, over the next twelve months.
Whenever the gold:oil ratio has been less than 10:1 (i.e., oil was expensive relative to gold), crude oil has lost 7%, on average, over the next twelve months.
Whenever the gold:oil ratio has been between 10 and 30, crude oil has returned 5%, on average, in the following 12 months.
Whenever there has been a major spike in crude oil prices over the past 50 years has been followed by a rising gold price as illustrated in the chart below:
If the above holds true this time round with WTIC having increased by 84% in just the last 12 months alone the above analysis strongly suggests that Gold is about to soar.
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