CHART: Gold price vs oil has never been this out of whack
In late afternoon trade in New York on Monday gold for April delivery jumped to $1,130 an ounce, a 3-month high and up 7.5% from multi-year lows hit mid-December.
In contrast the price of oil plummeted 6.4% to $31.47 a barrel, wiping out a good chunk of last week’s gain as crude continues its rollercoaster ride at more than decade lows.
Gold and oil usually rise and fall in tandem. Conventional wisdom is that rising oil prices push up inflation increasing demand for gold as a hedge.
Since 1970 the average ratio – how many barrels of oil can be bought with one ounce of gold – is around 15.
From an average of 33.2 in January, today the ratio climbed to nearly 36:1, levels not seen even at the height of the oil crisis in 1973 (in June that year an ounce of gold got you 33.8 barrels).
At the time both crude and gold were becoming more expensive. Oil averaged $4.75 a barrel in 1973 and gold $97 an ounce. In 1974 oil prices averaged nearly twice that and gold went for $154 an ounce.
The same thing happened at the end of the decade when a record gold price in inflation adjusted terms again coincided with a sharp rise in the price of oil (like today, Iranian oil was a significant factor influencing the oil price). Oil averaged $37.40 in 1980, a price only exceeded 24 years later.
Today the relationship between the gold and oil is probably more a function of the dramatic slide in crude rather than the strength of the gold price.
Then again few believe gold or oil are grossly overvalued at current prices so another rise in tandem may not be that farfetched.
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Image Wikipedia: The Shah of Iran opens the facilities of International Naval Oil Company of Iran in 1970.