Will the historically high "gold-oil ratio" return?

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1. How to explain the current large divergence in the gold-oil price ratio?

The current gold-oil price ratio is the second highest in history, only lower than the negative oil price stage during the 2020 pandemic oil glut. We believe the difference comes from pricing factors—

1) Crude oil is fundamentally priced. Over the past decade, oil prices have closely tracked fundamentals (OECD oil inventories). At present, OECD oil inventories are at medium-low levels, but oil prices have fallen first because the market expects a continued loosening of oil fundamentals in 2026, which will lead to increased inventories.

2) Gold is priced by macro factors.

2. Relationship between gold price, oil price and the US dollar index

2.1. Gold price and US dollar index are negatively correlated in the long term

Regression shows that gold price and the US dollar index have historically shown a long-term negative correlation. Segment regressions for 1986-2000, 2000-2020, and 2021-2025 all indicate negative correlation.

2.2. Oil price: Relationship with US dollar index changed after 2020

Regression shows that from 1988 to 2000, oil price and US dollar index were positively correlated; from 2000 to 2020, it became negatively correlated; from 2021 onward, it became positively correlated again.

Gold has both financial attributes, while oil has a stronger physical attribute.

The change in the oil price vs. US dollar index relationship is related to drivers of global oil demand:

Before 2000, US demand drove oil consumption; when the US was strong, both oil price and USDX were strong, so they were positively correlated.

From 2000 to 2020, demand was mainly driven by China. If the US economy weakened and the dollar entered a loosening cycle, it would instead improve demand in China and other emerging economies (from 2000 to 2020, global oil demand increased by a total of 14.63 million barrels/day, China accounted for 9.75 million barrels/day, or 67%; US+Europe was -31%).

Since 2021, China's demand growth slowed, and US-led demand returned as the primary driver (from 2020 to 2025, global oil demand expected to increase by 12.11 million barrels/day; China accounts for only 2.12 million barrels/day, or 18%; US and Europe 28%, other non-OECD countries 47%).

3. Past causes of gold-oil price ratio reversions

First, there is a difference before and after 2000. After 2000, oil vs. gold prices have been somewhat negatively correlated (when USDX is weak, oil prices are weak but gold price is strong), so it is reasonable that post-2000 gold-oil ratios have become more extreme.

Second, historically, each time the gold-oil price ratio reached an extreme high, it was caused by a sharp drop in oil prices. Each reversion from an extreme was marked by improvement in the real economy and an oil price bottom and rebound.

Third, after the extreme reversion, gold prices peaked within 4-5 months (when the ratio reverted in March 2016, oil price bottomed that month and gold price peaked in August 2016; when the ratio reverted in April 2020, oil price bottomed that month and gold price peaked in August 2020. Oil price rebounds represent real-economy recovery, and after this the easing expectations are constrained.)

Author: Zhang Xixi, Jiang Meidan, Source: Tianfeng Securities, Original title: "Gold-Oil Price Ratio Divergence and Reversion"

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