Gold/Oil Ratio Slips Below 20-To-1

May 15, 2018

London (May 15)  Wanna trade? I’ll swap you 18 barrels of my crude oil for one of your one-ounce gold bars. Yes, that’s right. Eighteen. Oh, I know you once commanded as much as 39 barrels for your gold, but that was then. This is now.

You see, for the first time in three years, the gold/oil ratio is below 20-to-1. You can see the ratio’s recent track record in the chart below.

Historically - at least since the price of gold was allowed to float - the ratio averaged 15-to-1. That’s an average, mind you. There’s been plenty of variance on either side of the dashed line, mostly as the result of changes in the economic climate.

The ratio’s recognized as a sort of canary in a coal mine, giving advance warning of turbulence ahead. At 15-to-1, both oil and gold are priced to perfection. Oh, there’s some wiggle room that will be tolerated before pundits start writing screeds decrying the market environment, but go above 20-to-1, making gold too expensive or oil too cheap, and we’re in crisis mode. Or so it has seemed for a quarter century. Spikes in the ratio preceded a number of financial calamities, including the Asian currency crisis of the late '90s, the Great Recession and, most recently, the Euromarket predicament.

The ratio peaked near 47-to-1 in February 2016, when West Texas Intermediate crude dipped below the $27 a barrel level. Since then, the ratio lurched lower as oil prices have risen. And, with WTI now topping $70, the ratio has punched through the 20-to-1 floor.


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