Macro Wrap – Would I Rather Own Oil or Gold? $GLD, $USO

by Enis September 13, 2013 8:34 am • Commentary

Black Gold (oil) is in favor in 2013, while traditional Gold can’t hold a bid.  Oil and gold are two of the most important globally traded commodities, but for much different reasons.  Oil is the benchmark for traditional fossil fuel energy needs around the world.  Shifts in oil prices have an immediate impact on growth and trade.  Gold, on the other hand, has been more frequently viewed as an alternative currency, though significant debate surrounds its investment merits.

While most commodity prices are lower in 2013, oil is up more than 15%, the clear outlier of the asset class.  The recent outperformance of oil relative to gold has brought the oil / gold ratio to near its long-term average over the last 30 years:

Front month WTI Crude Oil contract / Front month Gold contract ratio, Courtesy of Bloomberg
Front month WTI Crude Oil contract / Front month Gold contract ratio, Courtesy of Bloomberg

The cheap oil period of the late 1980’s and 1990’s is clear from the chart.  Since 2002 though, when the commodity boom really got going, the oil and gold ratio is unchanged (both have increased the same percentage).  Oil was the initial leader, zooming high in the mid-2000’s, and gold has been the bigger beneficiary since the start of the financial crisis in 2007.  Net-net however, the ratio is back to its long-term average.

So from where we sit now, would I rather own oil or gold?  Most incremental growth in oil demand is coming from developing markets, while developed markets shift consumption increasingly away from fossil fuels through improved fuel efficiency and alternative energies.  In that sense, I’m surprised to see that the 2013 outperformance of oil has coincided with broad underperformance in emerging market growth and related assets.  The oil/gold ratio has generally outperformed during times of developing market outperformance.

The oil/gold ratio might be signaling an imminent reversal in fortune for the struggling emerging markets relative to developed markets.  On that front, I’m skeptical.  More likely, the ratio is now correcting for several years of gold overvaluation relative to other commodity assets.  With the ratio now near the long-term mean, the next move for both gold and black gold will likely be determined by the overall direction of commodity markets as a whole.