Oil-Gold ratio: Dial down deflation concerns

This was an original research paper from the CME Group.

Comparing the relative value of two high profile commodities can often reveal interesting insights.

Our analysis of the oil-gold relative price suggests that worries of deflation may be overdone and confirms our view that the crude oil price collapse may be more reflective of the production boom than consumption trends.

In recent months, the exchange rate between gold and oil has experienced a very strong move, bringing the oil-gold ratio (the number of barrels of oil needed to purchase one ounce of gold) to near record highs (Figure 1). Since June, the number of barrels of West Texas Intermediate required to purchase one ounce of gold has more than doubled from 12.5 to 28 as oil prices plunged in dollar terms, while gold prices held relatively steady (Figure 2). During the past 30 years, the oil-gold ratio has averaged about 16 barrels of oil for one ounce of gold.

That said, the oil-gold ratio is not yet at historical extremes: it achieved 28.25 in February 2009 and rose to over 30 during the 1985-86 slump in oil prices. While this recent run-up in the oil-gold ratio has been driven by the drop in the oil price, it is interesting to examine these two commodities together to appreciate what they may be telling us about the future of the global economy.

Figure 1: Oil/Gold Ratio
Source: Bloomberg Professional, GCA and CLA, with CME Group Transformations.

Figure 2: Gold and Oil: A Tale of Two Commodities
Source: Bloomberg Professional, GOLDS and USCRWTIC

Page 1 of 3
About the Author

Bluford “Blu” Putnam has served as Managing Director and Chief Economist of CME Group since May 2011.