Curious Relationship of Gold and Oil Prices

Oil and gold have moved in tandem in the last thirty years in a long-term link since oil prices impact inflation. In the short run, however, these two major commodities can move independently of one another. Their relationship has fluctuated and isn’t always easy to trade.

One way that investors like to track gold’s relationship with crude is through the gold-oil ratio, indicating how many barrels of oil an ounce of gold will buy. This ratio is found by dividing the price of gold by oil’s price. Historically-high ratios have occurred when gold was expensive relative to crude. Lower values were seen when gold was cheap compared with oil.

Since 1985, the gold-oil ratio has meandered between 7 and 36. In early October, it hovered around 23, versus its long-term average of slightly above 15.5. West Texas Intermediate crude prices sank to a six-and-a-half-year low of $38.22 a barrel in late August, but have risen a bit since. Gold dropped to a six-year low of $1,080 an ounce in July.

Gold and oil, of course, respond to macroeconomic factors–including the value of the dollar and other major currencies, national monetary policies and real interest rates. Gold often reacts more strongly to geo-political and financial tensions than crude, while oil is heavily influenced by its own supply-demand factors.

Economic slowdowns, particularly outside of the United States, have hurt demand for crude oil and gasoline. A growing shift toward renewable energy has made inroads too. Nonetheless, oil consumption could reach a five-year high in 2015, according to the International Energy Agency.

In retrospect, low oil prices have eventually improved as producers cut output in response to weak prices. But at times, such as 1986 to 1988, oil stayed low relative to gold for an extended period. Meanwhile, for gold to rally, the market would need to see tensions in the Middle East or another region escalate, a financial disaster develop, or a pickup in inflation.