As the charts below highlight, this ratio is at or near its all time highs. Historically, a ratio near 25 indicates an entry point to sell gold and buy oil and, conversely, a ratio of below 10 equals an opportunity to sell oil and buy gold. As of the close on Friday (2/20/2009), this ratio was at 25.0 based on light sweet crude trading at $40.03 per barrel and gold trading at 1,002.2 per ounce.
Gold and oil quite often rise in tandem due to inflationary concerns and geo-political risks. The price of oil today, and in fact its trajectory over the last six months, suggests that there is a little on the horizon in terms of major geopolitical risks. To some extent, this is a self fulfilling prophecy since when the price of oil decreases, so obviously does the power of Russia, prominent Middle Eastern nations, and Venezuela. In addition, while gold seems to be flashing inflationary concerns, few other commodities are following suit, which means either gold is early, or wrong, in this signal.
To be fair, the gold oil ratio is only one relative value factor and both oil and gold are also driven by a completely independent set of fundamental factors. That said, we reference George Santanyana's guidance: "Those who cannot learn from history are doomed to repeat its lessons." History is quite specifically telling us that the short oil, long gold trade is likely in its final innings.
Daryl G. Jones