What is the gold to oil ratio?
The ratio of gold to oil shows how many oil barrels can be bought with 1 ounce of gold. A lower number is associated with a healthy economy. Oil and gold have a relatively strong historical relationship. They are hard assets that move similarly in inflationary environments.
Gold represents a safe haven during times of economic and financial stress
Oil represents the overall health of the economy
How’s it calculated?
Gold to oil ratio = gold price divided by oil price
What does the ratio say?
Ratio below 20 suggests a healthy economy, a ratio above 20 signals crisis.
Whenever the ratio is above 20, there has usually been some type of market crisis. Note the previous three spikes correspond with the Asian Financial Crisis, the 2008 Financial Crisis and the more recent EU sovereign debt crisis.
Differences between oil and gold
There are some major differences in how supply and demand affects the price of gold and oil.
Oil: every day the world consumes 93 million barrels of oil. However, over the last two years there has been an excess of supply coupled with weakening demand from China and a slowing world economy. This has led to oil falling from over $100 per barrel to $30. Despite this glut, OPEC and other oil producing countries continue to produce record amounts of oil to maintain market share. Oil is delivered and consumed, and these fundamentals of supply and demand closely apply. Increasing supply plus falling demand equals falling price.
Gold: gold miner production is expected to peak in 2015 or 2016, and to decrease from there. Since gold is mostly traded via paper markets and not delivered, the nearly five-year low price point for gold may not fully reflect its supply and demand fundamentals. Gold discoveries are rarer than ever, and the cost and risks to mine are very high. Yet, this declining output is not yet seen in the gold price.