Oil, Stocks, Bitcoin, & Gold Spot Price Relationships

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Although it is a common misconception that the gold spot price and the stock market always trade inversely, looking at ratios and relationships between assets is immensely helpful. There are so many to consider because they all offer you a glimpse of where your investments may move based on historical trends. Of the major asset classes including oil, the stock market, Bitcoin, and gold, which ratio offers you the most pertinent information? Which relationships are the most telling about how the economy is doing? Truthfully, each relationship gives you a small view of the bigger picture, so it all depends on what kind of information you are looking for.

Gold Spot Price and Bitcoin: What’s The Relationship?

Gold and Bitcoin have had a weak relationship throughout its history, until the COVID pandemic. Because investors recognized that both offer you the benefit of owning something that cannot easily be inflated, many investors today tend to argue over which is better. Truthfully, there are benefits to owning both Bitcoin and gold, but the fundamentals are radically different from each other. Basically, there is a finite amount of Bitcoin, a digital asset, while gold is limited and has no supply ceiling—yet.

As a digital currency, Bitcoin trades internationally, 24/7. One of the biggest issues with Bitcoin is its price volatility, but this may stabilize as it becomes more regularly used and supported. As for the gold spot price, it changes only when the market is open. Owning gold draws the appeal of physically holding your bullion, but many investors believe it is outdated or difficult to trade. However, both options grant the benefit of a solid inflation hedge since they are not tied to the US dollar. Given the current state of the world with the pandemic, investors have realized that there are benefits to both. This new demand seems to strengthen the gold and Bitcoin relationship even though their correlation has been near 0 for all its history.

As we have seen from Bitcoin’s performance over the past year, Bitcoin can quickly move in either direction. Meanwhile, gold trades much more slowly, offering investors the price stability that Bitcoin is not famous for. What we can tell from this, even if the gold spot price is not rising alongside Bitcoin, is that people are afraid of inflation. When there is significant demand for either or both, inflation can be a particularly major concern at the forefront of investors’ minds. Will this always remain the case? No one knows for sure yet.

What Does the Gold and Oil Ratio Show?

Most auspicious precious metals investors are aware of the gold to silver ratio. However, some people may be familiar with or heard of the gold to oil ratio. Analysts sometimes utilize the gold to oil ratio as a metric to determine the gold price per oz trends over time. This ratio calculates how many barrels of oil could buy one ounce of gold. Over time, this can be a helpful predictor of a bottom in the gold market.

In the early part of 2000, the gold to oil ratio was historically low. At that time, gold was considered “uninvestable,” according to Goehring, because central banks could not sell out of it. After that, gold became much more popular through the years. Now, oil is not lucrative because of the world’s mission to go towards green energy. Despite that, prices are up noticeably whenever you pass by a gas station. So what does this mean for the gold spot price? Because years of research is available, Goehring believes that gold is a good buy when it is cheap in relation to oil.

What is the Ratio Right Now?

So right now, oil is trading above $65 per barrel across the board. This has been increasing for the past month because the end of the pandemic may be in sight, and the oil price tends to increase as we near the summer. On the other hand, the gold spot price has been falling over the past 30 days. This means the ratio is narrowing, and the gold price could have more to go. Goehring used the example of oil reaching $90 a barrel and gold dropping to $1,650 per oz. If this is the case, the ratio would be around 18:1, which may be around the bottom for gold before it rallies.

Morgan Stanley seems to agree that the gold-oil ratio is most telling at its extremes, but it is not a good indicator of the direction of oil futures. Inflation supports oil futures, whereas gold is a hedge against it. This means a positive correlation, indicating that higher oil prices parallel higher gold prices, but this is not always the case. Remember, correlation does not imply causation, which is what we are seeing right now. The pandemic has changed many relationships, but it is not clear if this is the new normal, or if things will change once the economy fully reopens around the world.

Gold and the Stock Market Relationship

Approximately one year ago, the stock market crashed and so did precious metals. However, after bottoming in March, the gold spot price enjoyed a steady climb through the summer. The stock market saw a similar response.

Usually, you will hear people saying that gold is a safe haven and people sell off their stocks to buy into gold when they are afraid of a collapse of some kind. As we can see, through the pandemic this has not been the case. But perhaps this is an unfairly short time period to consider the relationship. Many Americans turned to the market to buy the dip. On top of that, inflation is a major concern, which is why Bitcoin exploded above $50,000 despite being around $5,000 just a year ago. These are not normal times, which is why the markets have not behaved regularly.

Traditionally, a stock market crash usually increases the gold spot price because of its negative correlation. The stock market tends to grow with economic growth and stability, but precious metals benefit from financial distress and crisis. Over time, gold proves routinely to be a reliable investment during economic distress. What makes it especially attractive is that it tends to survive stock market crashes.

Right now, optimism is growing off the hope and trust placed in the COVID vaccines. Therefore, some investors may be moving in on the stock market once again. Unless something interrupts the positive outlook for the economy, gold may not rally for a period of time.

Gold VS The US Dollar

Once, the US dollar stood as a certificate that symbolized gold ownership. Originally, the dollar displayed a phrase that said “One Silver Dollar Payable to the Bearer On Demand” or “20 In Gold Coin Payable to the Bearer On Demand.” This was the gold standard, and it is not a phrase you will see on most paper currency now.

But, the US abandoned the gold standard during the Great Depression in an effort to help the economy regrow. Deflation was the biggest problem that stalled recovery since many citizens decided to hoard gold and silver coins instead of putting them into the economy. So, the US outlawed private gold ownership. Eventually, silver dollars and certificates went out of practice too. Although leaving the precious metals standard seemed to be temporary, no one moved back towards it.

What does this mean today for the gold spot price now that the US dollar is not pegged to gold? The dollar and gold have an inverse relationship. As the US dollar strengthens, the gold spot price decreases in value and vice versa. This is a definite relationship that persisted despite the pandemic.

Now with President Biden’s new relief package, there are concerns about the devaluation of the dollar. Although government officials say that inflation is not a concern at this time, not everyone is so certain. This is one of the major reasons why so many companies are expanding their balance sheets to include Bitcoin now. People are not certain of the performance of the dollar. This may be positive for the gold price per ounce moving forward.

Gold and Bitcoin and Other Assets

In conclusion, gold trades with other assets on a case-by-case basis. Not every asset has a clearly defined relationship with the gold spot price. Also, understanding these relationships is no easier during the pandemic recovery. Historic data gives us an understanding of trends and how to use those charts, but nothing gives us the complete economic picture in one set of data. Additionally, everything we understand about the economy can suddenly change if there is a sudden geopolitical event. Therefore, choose which chart you want to use wisely, and take it all with a grain of salt.

Note: This article originally appeared at ValueWalk. The author is Eric Gozenput. Eric founded Bullion Exchanges at the age of 27 and has been featured in places such as Fox Business News, Forbes, Reuters, Seeking Alpha, Value Walk. Eric maintains that precious metals are vital for investment portfolios and that investing in precious metals should be convenient, transparent, and secure.