The Gold-Oil Ratio Approaches All-time Lows

Crude Oil Price in Gold: This chart shows the price of oil ($WTIC), the price of gold ($GOLD) and the number of barrels of oil one ounce of gold would buy for dates between January 1990 through today.

click to enlarge

Currently, one ounce of gold will get you 6.68 barrels of oil.

I think the chart makes it quite clear why Saudi Arabia and some others think oil is too high.

When Bill Clinton was president of the US, one ounce of gold could buy between 7 and 28 barrels of oil with the lowest ratio, 7.23 barrels of oil for one ounce of gold, occurring shortly before his last day in office.

It is interesting that during President Bush's term (following Bill Clinton) one ounce of gold bought between 6 and 16 barrels of oil with the lowest number of barrels per ounce in 2005 at 6.15. At today's record high prices for oil, we get slightly more barrels of oil (6.26 vs 6.15) for an ounce of gold!

Also of note is the 19 year support line indicates we are near an extreme level again.

Disclosure: None

Comments

[User 163397]

But does that mean that oil is expensive or that gold is cheap?

[Tim Plaehn]

Ditto, in the past did gold rise or oil fall at the ratio lows?

[Kirk Lindstrom]

I added a chart showing the US Dollar to the above chart and posted it at the end of the article at my blog.

If the dollar has bottomed and we can make it go up again, perhaps with an energy program that does not send trillions of dollars to OPEC and higher Fed Funds rates, then US consumers could get some relief at the gas pump.

[PrudentMan, CFA]

This is a good indicator that was used in the seventies. I will have to research to learn what the ratio was then as you may know gold had a big time move before it plunged.

To answer a previous respondent: As of today, historically gold is cheap v. oil. I know nothing about gold except that I foolishly bought two gold wedding rings that I am still paying for.

Personally, oil is more useful than gold. This is one thing I agree with Warren Buffet on.

[Robert Sczech]

Industrial civilization can thrive without gold, but it can not survive without oil. Already a stagnating oil production can cause significant problems as we experience now. While gold is being mined for hoarding (all the gold ever mined is still around), oil is being burned within a few weeks after being produced. Worse still, once burned, oil can not be recovered, that is, oil is a nonrenewable resource.

I think the declining gold/oil ratio is just a reflection of a global revaluation process. Energy used to be extremely cheap, in the future all energy will be very expensive. My bet is that the gold/oil ratio will decline further towards a long term equilibrium value somewhere between 1 and 3.

[Robert Sczech]

User 163397: gold is fairly priced if not expensive, but oil is still cheap.

[Dean Plassaras]

I think Kirk has a point. If Peak Oil issues continue to manifest themselves in increasinly higher oil prices, then anything related to Oil will have to be repriced.

[Engineer]

I would argue that gold would have to rise in this current environment. I disagree with those who argue that gold has no value. Physical gold has value as a STORE of energy in that 1) it takes a discrete amount of energy to extract and refine (which is becoming more expensive incidentally), 2) it resists corrosion, 3) it is easily divisible, 4) it is recognizable worldwide and is to some extent incorruptible and 5) it is beautiful. I challenge you to find me another store of energy accessible to everyone on the planet that has these unique qualities (aside from other PMs).

[Gary Lucido]

While interesting, this doesn't prove anything other than that the price of oil has gone up faster than the price of gold. This merely reflects that fact that the demand for oil has gone up faster than the demand for gold relative to the supplies. There is no reason to assume that the ratio should remain constant.

[[e-mail]]

Gold has & will remain to be real money,while oil is use in the production of many products, & it can be recycled, 1 14 in tire contains 1.5 gallon of bio-desiel, also Gold is under priced, the powers that higher Gold Prices would Harm,work together to surpress the true inflation adjusted price.

[Robert Sczech]

Engineer: Storing energy in a car battery means that one can recover a high percentage (80% to 90%) of that energy stored in the battery. Gold is not a store of energy since the energy expended in producing that gold can not be easily recovered. It takes energy to grind a stone into sand. Once the sand is produced, there is no easy way to recover the energy dissipated.

Having said that, I agree with you that gold is a highly desirable metal. The main usage of gold is jewelery (wedding rings). In other words, we need gold in order to attract a woman. We need oil in order to give more than 6 thousand million humans the privilege to participate in the unfolding drama on this beautiful planet located in a tiny spot of the universe. Without oil, the human population would be much smaller.

[johngonole]

Engineer and Robert both have good points. The truth is that supply and demand fundementals for both of these commodities are different. What they have in common is that they can both be purchased in dollars. Gold having pretty much a limited supply trades mainly with currancy supply and demand. Oil will reflect both currancy inflation/deflation and traditional supply and demand forces.

Engineer is correct that higher prices of gold will reflect the cost of energy it takes to produce it. If production costs go up than the supply of gold will flatline if the higher cost can't be passed on eventually. So gold is a store of energy to a certain point and its also a currancy. Oil is a currancy and a commodity. Oil is becoming more rare faster than gold so in these terms we should see the oil to gold ratio go down. Still most people who buy physical gold are looking for a currency hedge. Since oil is also traded in dollars gold will take into account all areas of inflation just not gold. So if gold is inflating at a higher rate than other assets gold will not keep up.

Silver to oil would be a more interesting ratio since silver is also consumed. There even latex beds having silve laced fabrics added to them. More and more Nanotechnology will use silver in the future. Silver will react to both currency inflation and industrial supply and demand fundementals.

If you haven't checked out silver consider purchasing some of it. Just a little

[yogiudo]

I had to interject here - Gold is NOT a store of energy.

Not unless we learn how to produce nuclear fission from Gold.
An energy store is exactly that. An energy store. There is no way to run a car on gold, or pull a wagon.

It takes alot of energy to extract it, however as an Engineer you should know that you can not get that energy back out of Gold.

Gold is, and will continue to be a form of money. Don't confuse yourself or others into thinking for one moment that gold is a store of energy, because it is not. Gold is metal. Uranium is also a metal, however it is a store of energy because we have technology readily available to convert uranium into energy.

Gold will however be an execellent hedge when the dollar, euro and fiat currencies begin to collapse due to greedy bankers.

[Alwie]

Gold is just a piece of metal guys. Wake up!