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's 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's 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 (WTI) crude dipped below the $27-a-barrel level. Since then, ratio's lurched lower as oil prices have risen. And, with WTI now topping $70, the ratio's punched through the 20-to-1 floor.
At face value, the gold/oil ratio's decline could easily be taken as a sign that some sense of normalcy is returning to the markets. Normalcy, of course, isn't authoritatively defined. Maybe it's better to say that that the decline heralds a return to normal volatility. That notion seems reasonable given the ratio's correlation to the Cboe Volatility Index (VIX).
In this sense, the gold/oil ratio is an indicator of market sentiment. Still, one can't ignore the fundamentals at work in the underlying markets: global oil prices are being levered upward by OPEC production cuts and Middle East flare-ups while gold is weighed down by growing prospects of interest rate hikes and a stronger dollar.
