What is the gold-to-oil ratio?
The gold-to-oil ratio determines the number of barrels of oil that one ounce of gold will buy at any given time. Essentially what this means is that the higher the ratio, the cheaper the oil, and the greater the value and purchasing power of gold. The ratio is recognized as a measure of volatility that comes from significant political and economic events. In the past when it has spiked to absurd highs it has been followed by some form of economic crisis.
Since World War 2, the annual average ratio has reflected the fact that one ounce of gold could buy precisely 14.83 barrels of oil. Whenever one ounce of gold can buy more than 14.83 barrels of oil, either oil is comparatively cheap or gold is comparatively expensive. Conversely whenever an ounce of gold can buy fewer than 14.83 barrels, then oil is expensive or gold is cheap. Spread traders and hedgers pay attention to changes in this ratio to create arbitrage opportunities which are in a sense directionless because they are predicated on convergence or a form of mean reversion.
In fact, over the last 26 years it has successfully predicted four crises and been a leading indicator of turbulent markets. This had led many pundits to rely upon it as a tool for identifying whether additional crises are emerging.The reasons for these claims is that at its heart it measures the proportion of one of the most important commodities for economic activity oil against gold which is widely recognized as the most desirable safe-haven asset during times of uncertainty.
This on first impressions raises concerns that the ratio is incapable of accurately forecasting crises.
While no simple ratio can accurately forecast every economic crisis, the gold-to-oil ratio does have an enviable history predicting may of the major economic crises that have occurred over the last 25 years. There were considerable market ructions at the end of 2015 and the start of 2016 regarding the potential for new economic crisis to emerge because of the deep slump in commodities.
This kind of information can either constitute fodder for a game of trivial pursuit or a trading opportunity. Generally, the weaker the ratio, the higher the probability that gold will rise in value and oil will fall, which suggests a pair trade that is still viable. Trade execution implementation could be through short WTI futures and long Comex gold, or via the relevant ETFs, or using cash and/or futures options to create comparable synthetic exposure. Timing is everything, but it may also be possible to leg into the position on a pro rata basis. Follow the Commitments of Traders (COT) report each week from the U.S. CFTC of speculator/investor and commercial interest in the underlying futures markets as your preferred sentiment indicator. Blather from raving gold bulls or blither from OPEC’s propaganda machine is infinitely less reliable.
www.macrotrends.net/...tio-historical-chart
The gold-to-oil ratio determines the number of barrels of oil that one ounce of gold will buy at any given time. Essentially what this means is that the higher the ratio, the cheaper the oil, and the greater the value and purchasing power of gold. The ratio is recognized as a measure of volatility that comes from significant political and economic events. In the past when it has spiked to absurd highs it has been followed by some form of economic crisis.
Since World War 2, the annual average ratio has reflected the fact that one ounce of gold could buy precisely 14.83 barrels of oil. Whenever one ounce of gold can buy more than 14.83 barrels of oil, either oil is comparatively cheap or gold is comparatively expensive. Conversely whenever an ounce of gold can buy fewer than 14.83 barrels, then oil is expensive or gold is cheap. Spread traders and hedgers pay attention to changes in this ratio to create arbitrage opportunities which are in a sense directionless because they are predicated on convergence or a form of mean reversion.
In fact, over the last 26 years it has successfully predicted four crises and been a leading indicator of turbulent markets. This had led many pundits to rely upon it as a tool for identifying whether additional crises are emerging.The reasons for these claims is that at its heart it measures the proportion of one of the most important commodities for economic activity oil against gold which is widely recognized as the most desirable safe-haven asset during times of uncertainty.
This on first impressions raises concerns that the ratio is incapable of accurately forecasting crises.
While no simple ratio can accurately forecast every economic crisis, the gold-to-oil ratio does have an enviable history predicting may of the major economic crises that have occurred over the last 25 years. There were considerable market ructions at the end of 2015 and the start of 2016 regarding the potential for new economic crisis to emerge because of the deep slump in commodities.
This kind of information can either constitute fodder for a game of trivial pursuit or a trading opportunity. Generally, the weaker the ratio, the higher the probability that gold will rise in value and oil will fall, which suggests a pair trade that is still viable. Trade execution implementation could be through short WTI futures and long Comex gold, or via the relevant ETFs, or using cash and/or futures options to create comparable synthetic exposure. Timing is everything, but it may also be possible to leg into the position on a pro rata basis. Follow the Commitments of Traders (COT) report each week from the U.S. CFTC of speculator/investor and commercial interest in the underlying futures markets as your preferred sentiment indicator. Blather from raving gold bulls or blither from OPEC’s propaganda machine is infinitely less reliable.
www.macrotrends.net/...tio-historical-chart
The analyses provided are for informational purposes only and do not constitute financial advice or recommendations to buy or sell anything. The information presented is based on personal research and interpretation.
