What is the gold-to-oil ratio?
The gold-oil ratio refers to the ratio of the price of gold per ounce to the price of crude oil per barrel, and is generally calculated using the spot price of London gold and the price of WTI crude oil. As of last night’s close, the spot price of London gold was $1865.9 an ounce, and the price of WTI crude oil was $73.73 a barrel, and the price ratio reached more than 25 again .
The meaning of the gold-to-oil ratio and the threshold of 25
Generally speaking, crude oil has a very high correlation with the global economy, and oil price fluctuations are also relatively large. The fluctuation of crude oil is the most important factor causing changes in the gold-oil ratio. The usual understanding of gold, as a safe-haven asset, the rise in the price of gold can reflect the instability of the global economy and geopolitical policies, as well as changes in liquidity. Therefore, simply looking at the increase in the gold-oil ratio, the combination is due to changes in various macro factors. The global economy is down, the price of crude oil is falling, and gold is rising due to risk aversion or liquidity factors. Therefore, the gold-oil ratio often It can be regarded as a very important leading indicator of global economic or policy changes. When the gold-to-oil ratio is in a relatively stable area, such as below 15-16, it means that the economy is positive, there is no risk in the world, and everything is singing and dancing. For example, from 2000 to 2007, the gold-to-oil ratio was very stable in the small range Volatility; Once the gold-oil ratio is rising again in an environment with large macro uncertainties, it is very necessary to be cautious at this time.
Of course, academically, some people understand the gold-oil ratio as an interest rate. This is simpler. The oil price itself contains inflationary attributes. The rising gold-oil ratio means lower interest rates. A low interest rate environment means a worse economic environment. Demand and greater uncertainty, so the price of gold and oil is often a reverse indicator of the global economy. In fact, it is essentially no different from the common people’s cognition.
Under normal circumstances, there is no need to be too vigilant about the normal fluctuation of the gold-oil ratio. Only when there is a large breakthrough, or even a certain extreme value, you need to pay special attention. Everyone generally pays more attention to the number 25, because in the past 50 In 2010, the gold-silver ratio exceeded 25, but every time it happened, something bad happened to the world economy. If it goes up further, it often indicates the outbreak of geopolitical crisis or large-scale economic and financial crisis. Since the gold-oil ratio is a high-frequency indicator compared to economic data or political events, it is an important leading indicator for traders in an uncertain environment.
What happened in the years when the gold-oil ratio exceeded 25 in history
Pulling up the data of the last 50 years, the gold-silver ratio broke through 25 and lasted for a period of time. There were probably such a few times. Let’s take a brief look back and see what the global political and economic environment was like at that time.
1986-1987-1988 Iran-Iraq War and Soviet-Afghanistan War
During this period of time, the entire gold-oil ratio has been maintained at around 25, and it lasted for three years. During this period, the international political situation was relatively chaotic. It’s more complicated than it is now. The gold-oil ratio indicated that oil prices began to plummet in early 1986, from around US$25.7 in January 1986, to US$9.6 in six months, and then until 1989, the entire center of oil prices remained at a central oscillation of US$15-18.
The “Chernobyl nuclear accident” and the stock market Black Monday in October 1987 also happened during that time, as did the ” US-Japan trade war “, the Brazilian government’s default and the signing of the Plaza Accord.
The sharp drop in oil prices since the end of 1985 continued until 1989, as well as the instability of the global policy economy and war factors, should be the core factors that pushed up the gold-oil ratio and maintained it at a high level.
1993-1994 Somali War and Black Hawk Down
Beginning in March 1993, the market worried about the economic downturn in the United States, pushing up the price of gold, and the drop in oil prices in the same period also boosted the price comparison of gold and oil. We all know the Somali war and the plot of the movie “Black Hawk Down”. worst military defeat ever suffered. Of course, the Russian “October Incident” in 1993, the US bond market crash in early 1994, and the political turmoil in Mexico are all relatively important political events.
The 1998 Asian financial crisis and the bankruptcy of Long-Term Capital Group
Although this period of time is relatively short, the impact is not small at all. Compared with the global economic prosperity from 2001 to 2007, it is certainly not such a good memory, but for Asian countries, especially the “Asian Four Tigers” at that time, the memory is very important. profound. The bankruptcy of Long-Term Capital Group, one of the world’s four largest hedge funds, is the best footnote to the capital market.
During the period of the Asian financial crisis in 1997-98, the price of gold did not rise significantly as a whole. The gold bear market that began in 1996 continued until the third quarter of 1999. The continued decline in crude oil prices should be the core factor leading to the soaring gold-oil ratio In fact, the international oil price plummeted from US$26 to around US$11. In fact, the implicit logic is very clear. This period of history is deeply remembered and will not be expanded. Recommend a movie “The Day of National Bankruptcy” to look at the Asian financial crisis in 1997 from the perspective of South Korea.
The subprime mortgage crisis in 2008-09
The big bull market started by the price of gold lasted until September 2011, while crude oil plummeted from 140 in early 2018. This period should be the most painful moment in the global capital market.
From the stock market to the property market, from commodities to bonds, from the virtual economy to industrial assets, it’s horrible!
China’s stock market bubble burst in 2015-2016
This period of history has just passed, in fact, it is not that long. When discussing the global capital market in 2015, the topics that cannot be avoided are: the sharp drop in oil prices, the bubble in China’s capital market, the pressure of RMB depreciation, and the slowdown of the global economy. This period of time is similar to the performance of oil prices during the Asian financial crisis in 1997. Gold remained volatile as a whole, but crude oil was still very strong in 2014. In the second half of 2015, it began to plummet and lasted until early 2016. Then gold and oil saw Historically large bottom areas.
18-19-20 years
At the beginning of 2018, there was Sino-US trade friction , and the global economic recession in 2018 continued until 2019. Beginning at the end of 2018, as gold began a new round of bull market, the gold-oil ratio fluctuated intermittently around 25 until the extreme value appeared in March-May 2020. In the middle is the global epidemic in early 2020, the historic plunge in U.S. stocks, the Russian-Ukrainian battlefield, the European energy crisis, and then the collapse of the U.S. bond market in 2022. Now to the beginning of 23, the gold-oil ratio has returned to above 25 again. Maintaining a high price ratio means greater uncertainty in global politics and the economy. Since 2018, we have clearly felt that various uncertainties are intensifying. The economy has not changed for the better because of the big water release, but is facing greater uncertainty.
The significance of the gold-oil ratio to gold and crude oil
In the process of breaking through the extreme value of the previous gold-oil price comparison, the performance of gold prices is relatively divided. The general environment has gone up and down, but most of them have risen; while crude oil almost always ends with a decline or even a sharp drop. Because crude oil reflects the global economy Therefore, the general economic environment is almost always relatively poor. This means that in this market environment, it is necessary to pay more attention to various possible risks and crises, especially to guard against various derivative uncertainties brought about by a sharp drop in oil prices.
The gold-to-oil ratio is back to 25. I don’t know what will happen, maybe nothing will happen. This is my best wish for this year. Indeed, the only lesson we can learn from history is that we learn nothing from history, because history, though strikingly similar, does not simply repeat itself.
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