Regular readers might remember an article I wrote early last year, looking at the historical price ratio between gold and oil. In that article I mentioned that the historic (15 year) ratio between gold and oil was 14.7, which meant that you usually need 14.7 barrels of oil (Brent crude) to buy one ounce of gold. Thanks to the collapse in the oil price in 2014 and 2015, the ratio had soared to a 15-year high of 31.6 at the end of January 2016.
When the ratio diverges so much it is very unlikely that it will keep moving in the same direction and far more likely that it will converge with the historical average. That is exactly what happened over the course of last year. The price of gold increased marginally (by 3.0%), from $1,118 per ounce to $1,152, while the price of oil soared from $35.42 to $56.79 per barrel (+60.3%).
This reduced the ratio from 31.6 to 20.29, which is still above the historical average, but the total return since the end of January last year, had you taken a short position on gold and a long position on oil, would have been 57.3%, which is not too shabby a return over the course of just 11 months.
However, if you read that article you may also recall that I questioned at the time whether the oil price could really bounce back as sales of electric cars were booming and there was such a high oversupply of oil. But towards the end of last year, OPEC agreed to its first production cut in over eight years, slashing total daily production by more than 1.5m barrels per day and boosting oil prices even further. This simply reaffirms that there are always external, and unpredictable, factors that can affect your investments at any given time…and that you should never doubt the accuracy of historical ratios!
So what do the historic price ratios between the major investment assets tell us about where prices are at the moment? In this article I have expanded the analysis to look over a 20-year period from 31/12/1996 to 31/12/2016. Within that time frame I have taken the end of year price for the FTSE 100, UK property prices, London property prices, the spot gold price per ounce and the price of a barrel of Brent crude oil.