The Gold-Oil Relationship

History has proven the value of gold to have a close relationship to the market movements of crude oil.  The relationship between the price of gold and the price of oil has been characterized by the Gold/Oil Ratio, a factor measuring the value of the number of barrels of oil that equate to the value of one ounce of gold.  From 1965 to 2005, the Gold/Oil ratio stood at an average of 15.3:1 (the price 15.3 barrels of crude oil equaling the value of 1 oz of gold) and ranged from the height of 33:1 to a historical low of 6.6:1. 

Since this average was established, gold has moved in both directions.  Crude oil and gold led the ascension of commodities for much of 2006, 2007 and the start of 2008. Gold initially shifted lower than oil, ending 2006 at 9.48:1 but, in the middle of 2008 was surpassed by oil.  Oil then fell behind as the year came to a close, opening the door for gold to greatly surpass the ratio.  The precious metal is currently selling at around 900 dollars while a barrel of oil is valued at roughly 40 dollars, thereby carrying the ratio to 22.5:1.

Within a greater historical perspective, these ups and downs merely suggest an inevitable realignment to a "fair mean."  In 2006 it meant that gold was likely undervalued and had great potential to move higher.  Today it means that oil is undervalued and will most likely ascend to far greater heights when the economy begins to turn around, consequentially carrying the price of gold significantly beyond its current status.