Monthly Archives: January 2013

Gold versus Oil: Battle or Bromance?

Two of my favorite commodities for investing and economic evaluation purposes are gold and oil.  Today’s post displays some issues to consider when assessing the relative performance of one versus the other.

While both gold and oil are commodities that do well when that asset class as a whole thrives, each asset also has specific characteristics that drive its individual performance.

Gold is the traditional “monetary metal,” with its performance being based upon issues such as the relative strength of paper money.  Oil is an industrial commodity, valuable for its ability to fuel economic growth…literally.Gold vs Oil: 1971-Present

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This chart (courtesy of macrotrends.org) shows the historic gold/oil ratio since the gold window was closed in 1971.  Although the average ratio is approximately 12-15, any ratio between 10-20 tends not to provide any clear signs as to which of the two will outperform the other.  The current ratio is slightly below 18, but with dovish global monetary policy it is not surprising gold is slightly more expensive in oil terms than the historical average.

Reasons why gold may continue to warrant an above-average ratio:

  • Continued loose global monetary policy fuels gold moreso than an industrial commodity like oil
  • Despite the low VIX and strong stock market, one can legitimately argue a 10-year US Treasury bond yield of 1.85% indicates there still may be some investor fear (with fear being one of the fundamental drivers of gold demand) and/or a weak economic outlook (which could be relatively bearish for oil)
  • Increased portfolio diversification using gold commodity ETFs (like $GLD) as opposed to gold stock ETFs (like $GDX) – whereas many folks prefer oil stock ETFs (like $XLE) rather than oil as a commodity when adding portfolio exposure to oil

Reasons why oil may outperform gold:

  • Strong recent $XLE performance may foreshadow economic strength and increased demand for oil
  • Reversion to the mean – for those who question whether these basic mathematical rules of thumb are legitimate indicators, please ask $AAPL shareholders how they feel about the “law of large numbers” this week

Each asset has fundamental drivers which could serve as catalysts to push either one higher over the next 5-10 years.  Which one do you prefer?

Related Reading: What Happened To Precious Metals? (Zero Hedge)