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More Bullion for Barrels as
Oil/Gold Ratio Nears 2017 Lows

(Reuters) How many barrels of oil does it take to buy one ounce of gold? Answer: fewer than at any time since the beginning of 2017.

The oil/gold ratio is used by some market watchers as a gauge of investor confidence and even a harbinger of potential financial crises. The lower the ratio, the greater the optimism over the outlook for global growth and the higher the appetite for risk.

The ratio has fallen to its lowest level since the first week of this year, at around 20, from a high of 27 in June and down from a record high of 42 in February 2016, when the price of Brent crude was struggling to recover from 13-1/2 year lows.

“It’s a non-academic way of saying the market is looking more at risk than at protection,” Ole Hansen, senior manager at Saxo Bank said.

The relationship between oil and gold and what they might say about investor sentiment was distorted from late 2014, when a flood of crude supply drove oil prices over the following 18 months to their lowest in well over a decade, even though global demand was robust.

Now, as oil supply and demand fall into balance, the more traditional relationship between the two is reemerging.

Gold has risen by 11 percent so far this year to around $1,275 an ounce, while Brent crude futures have risen by around 9 percent to their highest in over two years above $60 a barrel.

Gold is battling the headwind of a near-guaranteed rise in U.S. interest rates, while oil is benefitting from a coordinated cut by the world's largest exporters, who have stuck to their 10-month old deal to restrict output by 1.8 million barrels per day.

Now, with the world's major economies growing at levels not seen in years as the euro zone catches up with United States, and investor confidence running high, the oil/gold ratio could well have room to fall further.


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