You don’t see many analysts talking about the gold-oil price ratio. Usually it’s the gold-silver ratio, or gold-EUR or gold-AUD and other currencies that gold is measured against.
The past two days, following the settlement of the EU-forced bailout of Ireland (Ireland itself resisted as long as it could), have seen oil prices hitting fresh 25-month highs and gold resume its climb well past $1400 an ounce.
As I write, the oil price is now at $89.31 and gold is at $1413.81/ounce (both in USD, of course).
Nominal & Real Gold-Oil Price Ratio
As anyone who has been paying close attention throughout the past three years can see, not only is this the highest nominal price level for gold ever (it is still, of course, much cheaper in real terms than it was at the height of 1980), but this is also the highest that gold has been next to a rising oil price. The average inflation-adjusted oil price in 1980 was $99.11 (the nominal price was $37.42), while the inflation-adjusted price of gold at its 1980 peak was around $2100/oz depending on who is measuring it (the nominal price was just over $850/oz).
So the current inflation-adjusted (more or less) gold-oil price ratio (i.e., the gold price divided by the oil price) is about 15.82.
Whereas the 1980 inflation-adjusted gold-oil price ratio ($2100 divided by $99.11) is about 21.18.
This means that in 1980, the last time gold was through the roof (remember, gold bugs from 1980 still haven’t made their money back), the gap between the gold price per ounce and the price of oil per barrel was still quite a bit wider than it is today. On the one hand, this is just another way of saying that gold still has more room to climb.
On the other hand, it’s also suggesting a concomitant rise in the price of oil that betrays further weakness in the USD, which is being used to measure the price of both gold and oil.
Commodity Bulls vs. Jeff Rubin
In a near-term context, however, the gold-oil price ratio is interesting because we simply haven’t seen gold this high in the past, say, 10 years while the oil price has also been so high.
Both gold and oil continue to make new highs. And the more the real economy recovers, however slowly, the higher both of these are going to go. Because with growth comes inflation (good for gold) and more shipping and export/import activity (bullish for oil). And since the Fed won’t be able to raise its interest rates for years, there’s no hope of pulling the USD back in.
So basically this is all really bullish for commodities – at least until we hit the Jeff Rubin Ratio and the price of oil shorts the global trade circuit and we double dip.
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