Chart of the Day – Oil to Gold Ratio Breaking Down

Chart of the Day – Oil to Gold Ratio Breaking Down

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Source: Bloomberg

Chart of the Day – Grams of Gold in 1 barrel of Oil.

We have now pushed lower through the 1g of gold for 1bbl of oil level, which is pretty rare by historical standards. We typically don’t spend a lot of time in this zone except during deflationary bust periods like we have seen in 1Q16 and during Covid.

I had been assuming that higher Gold to Oil Ratios were going in an environment of much higher gold prices and higher oil prices but what if higher GOR comes from stable oil and much lower oil prices?

Perhaps OPEC+ announcing they are getting ready to turn the oil production spigots back on again to gain back market share is part of a longer term strategy to hurt US Shale production growth potential in the future. OPEC has realized that global demand at these higher prices isn’t robust enough so they have recognized that lower prices are necessary but as long as they are receiving an appropriate amount of gold for their oil sales, they are going to be fine with it.

Lower oil prices would certainly be helpful for Emerging Market demand for oil into the future as EM per capita consumption of oil is significantly lower than what we have in the West.

Given all the talk over last couple weeks about potential changes in the petrodollar system that could be coming on the 50th anniversary of US/Saudi deal next week, the fact that the gold to oil ratio has moved down to 1g of gold for 1 bbl of oil seems like it’s probably not a coincidence.

If gold is being re-introduced as a pricing mechanism for oil (as opposed to US$), this seems like an important potential milestone. Maybe I am crazy. But figured let’s discuss it. Let me know what you think.

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