Historical correlation between Oil and Gold prices16 Sep 2024 13:48
Historical correlation between Oil and Gold prices
An interesting historical correlation exists between Oil and Gold prices which can fluctuate but somehow always tends to even out overtime:
The relationship between oil and gold is generally expressed as the **gold-to-oil ratio**, which measures how many barrels of oil can be purchased with one ounce of gold. Historically, this ratio fluctuates, but it often returns to a long-term average over time. To estimate what oil prices "should" be today based on the historical relationship, the steps are as follows:
1. **Historical Gold-to-Oil Ratio**: The long-term average ratio is approximately **15 to 20**, though it can fluctuate significantly due to market conditions. For recent decades, a commonly cited average is around **16**.
2. **Current Gold Price**: We need the current price of gold (in USD per ounce) to make this calculation.
3. **Calculation**:
- Use the historical average gold-to-oil ratio.
- Divide the current gold price by this ratio to estimate the oil price.
Given the current gold price of **$2,587/ounce** and using the historical gold-to-oil ratio (commonly around **16**), we can estimate the current price of Brent oil.
### Calculation:
1. **Gold price** = $2,587/ounce
2. **Historical gold-to-oil ratio** = 16
Estimated oil price = \( \frac{2,587}{16} = 161.69 \) USD per barrel.
Therefore, based on the historical correlation and the current gold price of $2,587/ounce, the estimated price for Brent oil should be approximately **$161.69 per barrel**.
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