St. LOUIS () -- With oil now hitting record highs and gold well off mid-May levels, the gold-oil ratio continues to shrink. Today, one ounce of gold only buys 8.57 barrels of oil - a ratio of 0.11.
Oil hit a fresh record high of $75.78 a barrel today, boosted by strong demand in the United States and global tension ranging from Iran's nuclear work to North Korea's missile tests.
Prices drew early support from a U.S. government report yesterday showing gasoline demand grew by 1.4% in the last four weeks from a year ago, with summer driving months still head. But rebel attacks in Nigeria, the world's eighth-largest oil exporter, have shut almost a quarter of the country's output and the Iranian nuclear row has raised fears of supply cuts from the world's fourth largest oil exporter.
Oil is up 23% this year on these geopolitical tensions and a flood of investment fund money into commodities, and many analysts are saying high oil is hear to stay. It has rallied from below $20 at the start of 2002.
In the meantime, this year gold soared to a high of $730 per ounce on May 12th, its highest in 26 years. But just as quickly as it sprinted to record highs, the yellow metal plummeted by $190/oz to a low of $542/oz just four weeks later.
Despite gold regaining some of its luster of late, the gold-oil ratio continues to slide. In May, using the average price of gold and oil for the month, the ratio was 9.57 barrels per gold ounce; the ratio averaged 8.4 bbl/oz in June. So far in 2006, the average gold-oil ratio is 8.3 bbl/oz - or around 0.11 gold ounces per barrel of oil
The long-term ratio has averaged about 17 bbl/oz since 1970. So far in 2006, the average ratio has been 8.7 bbl/oz.
Using the 36-year ratio, the "suggested" price for gold is $1,258/oz with oil at $37/bbl. Using the 2006 average, gold comes to $644/oz with oil at $72.9/oz - pretty close to today's price differential.
Oil and Gold Prices
Crude for August delivery climbed as high as $75.55 a barrel, to a set a record on the New York Mercantile Exchange for a front-month contract. It then pulled back to a close at $74.09, down $1.05.
Today, gold closed down $1.50 for the day at $634.80/oz on NYMEX. However, it gained 3.1% overall this week on tensions in North Korea and 4.8% last week on buzz that the Fed's interest rate hike campaign is over.
