The price of gold bullion and crude oil are highly correlated, and over the past 60 years, one ounce of gold has on average purchased 15.2 barrels of oil. With gold trading at around $525 per ounce and crude oil trading at $59, this ratio today stands at 8.9 today.
The price of gold has not been sitting out the commodity rally through. It's up nearly 13% in the last month, and 21% in the last year. In spite of gold's recent gains, the ratio remains out of whack, and near an all time low of 6.6 set back in August of this year (recent appreciation of gold and declines in the price of oil have set the ratio moving back toward the historical balance).
With oil unlikely to decline below $50 anytime soon, the price of gold is likely to rally in the coming years - and in a big way. Historical data shows that when the ratio falls below 11 (meaning one ounce of gold will buy you 11 barrels of oil), the ratio not only will come back in line with the average, but that speculation drives the ratio above the historical average of 15.2, as has been evidenced every time that the ratio fell below 11.
Big Idea Investor Publisher Ian Wyatt wrote, "Let's assume that the price of crude oil falls to $50 per barrel. Using the historical 60 year average ratio of 15.2 barrels of oil per ounce of gold, this would mean that the price of gold would move from $525 per ounce to $760, an increase of 45%. Assuming the ratio moves above 15.2 on over speculation in the gold market in the coming years, and we could easily be looking at $900 or even +$1,000 per ounce of gold."
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