Trouble Ahead? The Gold-Oil Ratio Is Inching Back Up

"...the dollar is even weaker than it appears."

By Peter Schiff

The Gold-Oil ratio — which signifies how many barrels of oil you can buy with an ounce of gold — has been steadily rising since its dramatic COVID-era spike in April 2020. A high ratio tends to signify economic trouble and a weak dollar, since it demonstrates that gold has an even more dramatic rise in purchasing power for the world’s most important commodity, even as inflationary pressures push up the prices of both. 

When the dollar value of an ounce of gold skyrockets notably more than a barrel of oil, it tells an powerful tale about how weak the dollar really is. That’s exactly what happened in April 2020, when the ratio skyrocketed to over 90. For reference, the 25-year average is 15.8. Since then, despite sharp corrections in May 2022 and September 2023, the ratio has been rising and now sits at about double that multi-decade average.

Gold to Oil Ratio, 2019-Present

The prices of both assets rise during periods of high inflation and geopolitical uncertainty, especially during times like these, when a serious armed conflict is threatening to engulf a major oil-producing region. Oil shortages and logistics disruptions in the Middle East could push the price of oil higher, tightening the ratio, but gold often benefits from the same sort of chaos. Also, struggling consumers in the US, China, and Europe have cut costs and are traveling less, sufficiently decreasing demand for oil to potentially offset the difference. However, this is also an effect of a struggling global economy. The US is less dependent on foreign oil than it used to be, but a debased dollar is bound to push oil higher either way.

The common denominator is a weaker US dollar. In conflict zones, whoever has the capability to do so will protect their wealth with gold. Meanwhile, the US is joining Europe, Canada, and other regions and turning on its money printers to save its sputtering economy and send more military aid to Israel and Ukraine despite high prices being far from under control. Lowering interest rates now will send inflation higher, causing gold and oil to both go up. Whether or not the ratio spikes, or the two commodities rise more or less in tandem, will depend in large part on what develops in the Middle East and how it affects oil supply and demand dynamics.

Currently, analysts at Morgan Stanley and Goldman Sachs are anticipating lower crude oil prices in response to OPEC+ planning to increase production, offsetting demand fears in the wake of Libya halting oil production entirely. With an economic slowdown in China, the largest importer from OPEC+ countries, lower demand is currently offsetting the effects of geopolitical tension. China is taking many steps to stimulate its economy, but its economic woes are far from over and the solutions merely kick the can down the road. Either way, demand is likely to stay relatively low.

As an economic crystal ball, the gold to oil ratio is far from perfect, with different factors affecting both. But there are plenty of commonalities as well. And when you can buy more oil for less gold, as has been happening as of late, it tells an undeniable tale that the dollar is even weaker than it appears when you look at the price of gold alone.

Meanwhile, Gold Weathers Mixed Data

In his latest podcast episode, Peter addresses another batch of economic data, its impact on the precious metals market, and inherent weakness in the economy. The political and media class wants Americans to think the economy is in good shape, but as Peter will explain, that claim doesn’t pass the sniff test. 

The metals market declined slightly last week since some data, including consumer confidence, appeared more positive than forecasted. Gold stocks declined more than gold itself:

“If you look at the reaction and the media spin on this data, you would think that we got good news, but we actually got nothing but bad news. And because of the misperception, we did have a pullback in the price of gold, although minimal; gold closed over 2,500. So the pullback was about maybe a third of 1% from where we were a week ago. But despite that very minor decline in the price of gold, gold stocks got hit pretty hard.”

Some data may be better than expected, but this doesn’t change the fundamental illnesses plaguing the economy:

“People are going into debt just to keep their economic head above water. This is not good times. This is nonsense that the media wants us to believe– that we deplete our savings and go into debt when times are good. No, we don’t. … If you run into an old buddy of yours that you haven’t seen in a long time and you say, ‘Hey, how you doing?’ The guy says, ‘Well, I’m loaded up with debt. I maxed out three credit cards. I depleted my retirement accounts. I pulled all the money out of my IRAs and I spent it all.’ Is your assumption that the guy’s doing terrific?”

It’s unlikely that government statistics can adequately quantify the effects of inflation:

“This is the disaster of an economy. If you look at the personal income and spending numbers, they’re not even adjusted for the actual inflation rate. The main reason that people are spending more money is because things cost more. That’s why they’re spending more. They’re not buying more. They’re just paying more. Now I know there’s a deflator that’s here that’s supposed to equalize it, but it’s all BS because the government numbers by design do not capture the real degree to which prices are rising.”

With the Fed contemplating rate cuts, the fault lines in the economy could become even more visible soon:

“We have a very weak economy; it’s much weaker than people perceive. But that weakness is not going to push inflation down; it’s going to actually pressure inflation up, which is going to go up anyway. But as the dollar rolls over—and the dollar, I think, is in the process of collapsing—as the dollar collapses, that’s going to ignite a new surge in commodity prices, in particular oil, but across the board. And all of that is going to put a lot of upward pressure on the CPI at the same time that the recession is worsening.”

Other data are more obviously negative, with a decline in manufacturing serving as a strong signal of coming recession:

“Look at the Dallas Fed manufacturing: another negative month. I can’t even remember the last time this was a positive month; it was minus 9.7. Yeah, it wasn’t quite as bad as the minus 17.5 that we got in July, but it’s still a negative number, right? These are weak numbers. All of the data confirms that manufacturing has been in a recession. So how can manufacturing be so weak, and the Biden administration claim, and through Harris now, that the economy is so strong?”

Peter thinks political polls are understating the nation’s support of Donald Trump, especially with the media propping up the Harris-Walz ticket:

“I still believe that a lot of the people who are being polled, I mean, I don’t know how they ask these questions, but they’re probably, maybe embarrassed to say that they’re going to vote for Trump. They want to give the answers that the pollsters want; they want to virtue signal. ‘Oh yeah, I’m going to vote for Harris,’ you know, because maybe you’re a better person if you support Harris. But when people get into the voting booth, there’s nobody there. There’s no cameras. You can vote your conscience.”

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