Oil Price and Gold Price: What's the Connection?

Even if you were still on vacation last week you probably heard about oil hitting the $100 per barrel mark and gold climbing to an all-time high once or twice. But while oil has jumped nearly 80% in the past year, gold has appreciated less than half as much, according to UBS Securities.

So what impact does the price of oil really have on gold?

Over the past year, the average gold/oil price ratio was 9.8 times, UBS analysts told clients in a note. Early in the year, that number climbed as high as 12.6x, but dipped to a low of 8x in November. During the past five years, the average was 10.1x, with a range of 6.3x to 15.7x.

Despite gold’s recent ascent above $860 per ounce, UBS noted that the current ratio is relatively low on a historical basis at 8.8x. So if oil remains near or above $100 this year, and the gold/oil ratio gets closer to its 10x long-term average, UBS thinks gold could move up toward $1000 per ounce.

Given the firm’s forecast for oil to average $74 [WTI], gold could see more downside. However, if the ratio was again to climb closer to its five-year average, with oil at $74, UBS still sees gold around $740 per ounce.

“Gold could be resilient even if oil prices decline,” it said.