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Gold/Oil Ratio: Which Commodity Will Win?


Gold and oil are two of the world’s most heavily traded commodities and both are believed to be inflation bellwethers. Despite all the attention these commodities receive, not all investors are familiar with the gold/oil ratio, but recent fluctuations in the ratio may be saying it is time for investors to get acquainted with just how much oil an ounce of gold buys.

On July 5, an ounce of gold bought 11.75 barrels of oil, the fewest since November 2008 and just below the average of 12.47 barrels since 2000, reports Debarati Roy for Bloomberg. Putting that into historical context as it pertains to ETFs, on December 1, 2008, the SPDR Gold Shares (GLD) closed around $74.50. By the end of 2009, GLD traded over $107.

On December 1, 2008, the U.S. Oil Fund (USO) closed at $34.25. USO would finish 2009 over $39 as the darkest days of the financial crisis passed. Both commodities traded sharply higher during Thursday’s Asian session after Federal Reserve Chairman Ben Bernanke said after the close of U.S. markets Wednesday that tapering of the Fed’s bond-buying activities is not as imminent as previously believed. [Gold ETF Assets Still Shrinking]

Noteworthy is that over the past four decades or so, the gold/oil ratio has been in the area of 15. Investors looking for clues as to what might happen should oil’s rally gain further steam while leaving gold behind can go back to July 2009. After spending the first six months of the year below 15, the gold/oil ratio started creeping above that level, according to Hard Assets Investor.

USO was trading around $32 in early July 2009, but had gained about 25% by March 2010. GLD’s gain over the same nine-month time frame was 20.6%. However, USO is a short-term trading vehicle that has seen losses over the long-term due to contango, indicating the ETF is not for all investors. [How Contango Can Affect Your Commodity ETF]

A better idea is the U.S. 12-Month Oil ETF (USL) , which holds front month oil contracts along with futures contracts for the following 11 months, allowing the fund to damp out the adverse impact of contango.

Using Wednesday’s closing prices, the USL/GLD is just under three, meaning less than three shares of USL are need to buy one share of GLD. The ratio reached four in September 2012. Over the next month, both ETFs traded lower, with USL the worse offender with a roughly 10% loss.

U.S. 12-Month Oil Fund

ETF Trends editorial team contributed to this post. Tom Lydon’s client own shares of GLD.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.