Gold and crude oil, both denominated in US dollars, are strongly linked because:
- as the US dollar rises, commodities priced in USD fall, and vice versa, as the dollar drops, commodities generally go up;
- as crude oil prices rise, it impacts inflation because energy comprises about one-third of the Consumer Price Index;
- as the oil price rises, the gold price goes up, as more investors buy gold to diversify out of inflation-losing assets like bonds and cash,
- as oil prices rise, economic growth slows, because so many industries depend on it and its derivatives as a fuel source, i.e., natural gas, gasoline and diesel. (Diesel fuel is a major input for gold mining operations, therefore, as fuel costs rise, so does a producer’s costs per ounce, which can lead to lower output. If this happens across the industry, lower gold supply versus demand will hike prices) and
- a drop in global growth, particularly in the two largest economies, the United States and China, might signal a recession is coming which is almost always bullish for gold prices.
[so it is no wonder that] the gold to oil ratio is an important indicator of the global economy’s health.
This post by Lorimer Wilson, Managing Editor of munKNEE.com, is an edited ([ ]) and abridged (…) excerpt from an article by Rick Mills, for the sake of clarity and brevity to provide you with a fast and easy read. Please note that this complete paragraph must be included in any re-posting to avoid copyright infringement.
Source: Visual Capitalist
The chart below shows the historical ratio between the gold price and West Texas Intermediate (WTI) crude. Simply put, the gold to oil ratio is how many barrels of oil can be bought with an ounce of gold.
Historical gold to oil ratio. Source: Macrotrends
The chart is interesting for a number of reasons:
- almost all of the low points in the chart, when the ratio was below the historical average of 16, correspond to recessions (gray bars). This makes sense due to the fact that crude oil declines go hand in hand with low economic growth….
Historical WTI. Source: Trading Economics
Historical spot gold price. Source: Goldprice.org
…The five-year chart below shows the ratio spiking to an “off the charts” 91 in April 2020, the worst month of the coronavirus pandemic, before recovering about half to 46.62 in May, from which point it continues to fall to the current December 2021 ratio of 25.5.
- The all-time high of 91 in April 2020 was a combination of plummeting WTI which at that time was $16.80/bbl against a gold price of roughly $1,625/ozt. Remember, oil usually falls during recessions and gold rises but the covid-19 recession was extremely short-lived, depicted in the historical gold to oil ratio chart as a very thin gray line and, as economies recovered, growth and oil demand surged, thus lowering the ratio.
- When gold hit its all-time high of $2,034/ozt in August 2020, WTI was still floundering at around $32/bbl. It took a more than doubling of WTI over the next 15 months, and gold to fall around $200, for the ratio to revert back to 25, a long way from its historic high of 91 but still higher than its average 16.
5-year gold to oil ratio. Source: Macrotrends
…[The gold to oil ratio could tighten further but,] for that to happen, either gold prices need to rise or oil prices need to fall. Our research has found a lot of evidence to suggest that oil prices will keep going up.
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