Today I document and analyze gold and oil prices and their ratios from January 1970 to August 2018. 

As a reminder, we use monthly average London gold prices provided by Kitco.com and monthly average oil prices for West Texas Intermediate Crude (WTI) sourced from the United States Energy Information Administration (EIA).  

Last week, I reviewed prices and ratios of gold and oil from 1946 thru 1969 when both commodities were fixed by fiat in US dollars.

In a series of three steps from 1971 to 1973, the United States withdrew from the 1944 Bretton Woods agreement, devalued the dollar, and freely floated it against gold. When other industrialized countries floated their currencies in March 1973, a new world economic system was established with the US dollar as the world’s reserve fiat currency

The monthly average price chart for gold (red) and oil (blue) from January 1970 thru July 2018 is shown below:

The chart shows that the prices of gold and crude oil are most often positively correlated but oil is generally more volatile. At times there is a strong negative correlation. Both commodities are subject to exponential rises, parabolic falls, and short-lived spikes.

Over the 584-month period, gold to oil ratios exhibit wide variance, extreme volatility, and a very broad range from lows near six to highs above 30:

The ratios are distributed in a positively skewed bell curve with a mean of 15.9, a median of 16.2, and very few outliers on the lower end: 

The distribution is shown in tabular and histogram formats below:

Distribution of Au:WTI Ratios1970-2018 

From our data set and the distribution of monthly average gold to oil ratios from January 1970 thru August 2018, observations follow:

  • Ratios < 8.0 are quite unusual, occurring over 11 months or less than 2% of the time. They occurred in November 2000, six months during the spring, summer, and fall of 2005, and from May to August of 2008.
  • Ratios from 8.0 to 10.0 constitute one-tenth of the record.
  • Au:WTI from 10.0-12.5 comprises over a fifth of the monthly ratios.
  • The ratios between 12.5 and 17.5 occupy nearly a third of the distribution.
  • Ratios from 17.5-23.0 make up slightly more than one-fifth of the data.
  • The 23.0-30.0 interval covers about one-tenth of the months in our compendium.
  • The 12 monthly outliers at > 30.0 comprise slightly more than 2% of the total record. These abnormally high ratios occurred twice in 1973, 1986, and 1988 respectively, and six times during the summer and winter of 2016.
  • Our treatment begins in January 1970 when both gold and oil prices were largely fixed with an anomalously low ratio at 10.4. The ratio remained quite low at 11.5 or less until the so-called Nixon Shock in August 1971 when the “gold window” was closed. This action was followed by two official dollar devaluations before it was completely severed from gold in February 1973. Other industrialized countries floated their currencies on world exchanges a month later.

    Rampant US inflation from oil imports, the Vietnam War, expanding social programs, and the Federal Reserve expanding money supply resulted in a five times increase in gold prices in the early ‘70s.

    In July 1973, gold soared to $120 an ounce while oil remained fixed at $3.56 a barrel. The gold-oil ratio rose dramatically to nearly 34. In the next five months, WTI was officially priced at $4.31/bbl but because of ample supplies, actually sold for less than that on the open market.

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