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Will oil prices rise faster than gold prices?
Nov 3, 2012

It is not without reason that coal is often referred to as 'black diamond'. Oil and petroleum are also often referred to as 'black gold'. After all the minerals with their productive uses often give the unproductive gold a run for its money. No doubt gold acts as a store of value and is almost irreplaceable for its inflation hedging property. But energy resources like coal and petroleum too hold the key to future growth of humanity. At least until sustainable use of non renewable energy resources become financially viable.

Having said that, the prices of commodities like oil and gold have shown peaks and troughs. The historical data for how many barrels of oil could one could buy per ounce of gold particularly throws up some interesting results. If one looks at the data for last six-odd decades, the average oil to gold ratio has been 14.7 barrels. The same has, however, touched a high of 22.9 in 1995 (post US - Iraq war) and a low of 8.9 in 2005. Thus it is the relative demand supply trade off of the two important commodities that determines the way ahead for the oil to gold ratio. The last five years have seen gold getting prominence over its productive counterpart. Particularly with excessive money supply fuelling demand for the yellow metal from worldwide investor community.
But it seems the cost of exploring oil fields and extracting oil is set to soon skew the oil to gold ratio in favour of the former. As per Moneynews, the world's top oil and gas companies are struggling to deliver high output growth. Something that they must in order to outpace the burgeoning cost of exploration and development. In fact the recent results of oil behemoths like Exxon Mobil, Royal Dutch Shell point towards lower profitability. If that continues, companies may even refuse to spend more on exploration of new oil fields. Something that our domestic oil majors have already indicated. With that supply shortage of oil and petroleum products is a given. And we will not be surprised if the number of barrels per ounce of gold shrinks despite firmness in gold prices.

Now we do not want to speculate about which way the oil to gold ratio is headed. However, what is certain is that essential commodities, be it petroleum or agri produce, could vie for investor attention in the years ahead.

Data source:

This Chart Of The Day was published in The 5 Minute WrapUp - Is the oil to gold ratio set to get skewed?

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