Trouble Ahead? The Gold-Oil Ratio Is Inching Back Up
The Gold-Oil ratio — which signifies how many barrels of oil you can buy with an ounce of gold — has been steadily rising since its dramatic COVID-era spike in April 2020. A high ratio tends to signify economic trouble and a weak dollar, since it demonstrates that gold has an even more dramatic rise in purchasing power for the world’s most important commodity, even as inflationary pressures push up the prices of both.
When the dollar value of an ounce of gold skyrockets notably more than a barrel of oil, it tells an powerful tale about how weak the dollar really is. That’s exactly what happened in April 2020, when the ratio skyrocketed to over 90. For reference, the 25-year average is 15.8. Since then, despite sharp corrections in May 2022 and September 2023, the ratio has been rising and now sits at about double that multi-decade average.
Gold to Oil Ratio, 2019-Present
The prices of both assets rise during periods of high inflation and geopolitical uncertainty, especially during times like these, when a serious armed conflict is threatening to engulf a major oil-producing region. Oil shortages and logistics disruptions in the Middle East could push the price of oil higher, tightening the ratio, but gold often benefits from the same sort of chaos. Also, struggling consumers in the US, China, and Europe have cut costs and are traveling less, sufficiently decreasing demand for oil to potentially offset the difference. However, this is also an effect of a struggling global economy. The US is less dependent on foreign oil than it used to be, but a debased dollar is bound to push oil higher either way.
The common denominator is a weaker US dollar. In conflict zones, whoever has the capability to do so will protect their wealth with gold. Meanwhile, the US is joining Europe, Canada, and other regions and turning on its money printers to save its sputtering economy and send more military aid to Israel and Ukraine despite high prices being far from under control. Lowering interest rates now will send inflation higher, causing gold and oil to both go up. Whether or not the ratio spikes, or the two commodities rise more or less in tandem, will depend in large part on what develops in the Middle East and how it affects oil supply and demand dynamics.
Currently, analysts at Morgan Stanley and Goldman Sachs are anticipating lower crude oil prices in response to OPEC+ planning to increase production, offsetting demand fears in the wake of Libya halting oil production entirely. With an economic slowdown in China, the largest importer from OPEC+ countries, lower demand is currently offsetting the effects of geopolitical tension. China is taking many steps to stimulate its economy, but its economic woes are far from over and the solutions merely kick the can down the road. Either way, demand is likely to stay relatively low.
As an economic crystal ball, the gold to oil ratio is far from perfect, with different factors affecting both. But there are plenty of commonalities as well. And when you can buy more oil for less gold, as has been happening as of late, it tells an undeniable tale that the dollar is even weaker than it appears when you look at the price of gold alone.
