Michael Snyder in one of his articles pointed out a trend – whenever the price of oil relative to the price of gold drops, that is, gold to oil price ratio increases, there is a major economic crises. Michael Snyder is the author of the “Beginning of the End” and runs a couple blogs. He is known for his radical views on various topics including the global economy.
For the sake of curiosity, I decided to check his claim. A graph that shows a ratio of gold price over oil price in the last decades is what we need. First, let’s examine the last three global economic recessions: 1990, 2001 and 2007. A global recession or crisis, in essence, is the same phenomena – a decline in gross domestic product in numerous countries at once.
The below graph shows the ratio of price of gold per ounce over price of oil per barrel. On the left, it tells how many barrels of oil you can buy with one ounce of gold.
Figure 1. Left axis = # of barrels of oil you can buy with one 1 ounce of gold
The grey bars indicate the periods of global recession. On this graph, are there any large spikes during recessions? Yes, there are. If you look carefully, you can see that at some point, closer to the end of each recession, there is an increase in gold to oil price ratio. Michael Snyder’s observation looks to be true. Here are the details:
- In the 1990 recession, from September to February it went from 10 barrels of oil to 19 barrels of oil in 5 months. This means that in February you could have bought 9 more barrels of oil with one ounce of gold than in September.
- In the 2001 recession, from July to November it went from 10 barrels to 14 barrels of oil, again in 5 months.
- In the 2008 recession, from August to January it went from about 7 barrels to 22 barrels of oil, once again in 5 months
The interval of 5 months might be a coincidence but that’s not the point. The point is that gold to oil price ratio went up in a short period of time during each recession. Note, that the ratio went up during the second half of each recession.
Now, just a quick check if similar pattern in observed in earlier recessions.
Figure 2. Left = # of barrels of oil you can buy with one 1 ounce of gold
1948 recession – ratio is constant
1953 recession – ratio is nearly constant
1957 recession – ratio is nearly constant
1960 recession – ratio is constant
1969 recession – ratio is nearly constant
1973 recession – ratio slightly increased
1980 recession – ratio increased
1982 recession – ratio increased
According to recessions that happened after 1960s, yes, gold to oil price ratio is elevated and usually when recessions are about to end. This further confirms Michael Snyder’s point.
But what do these increases tell about the actual gold and oil prices?
First of all, gold to oil price ratio can only increase in three cases: gold price stays the same while oil price drops; gold price increases while oil price stays the same; gold price increases while oil price drops. The last case would create the largest spike.
Now, let’s take a closer look at the actual gold and oil prices during these spikes. In the graph below, gold price is in blue, oil price is in orange. On the left, it tells the price of one ounce of gold; on the right, the price of one barrel of oil.
Figure 3. Gold price = blue, oil price = orange. Left axis = price of 1 ounce of gold; right axis = the price of 1 barrel of oil
If looking towards the end of each recession, that’s what can be observed:
1948 – gold price and oil price both stayed the same
1953 – gold price and oil price both stayed the same
1957 – gold price and oil price both stayed the same
1960 – gold price and oil price both stayed the same
1969 – gold price and oil price both stayed the same
1973 – gold price slightly increased, oil price stayed nearly the same
1980 – gold price increased, oil price slightly decreased
1982 – gold price increased, oil price slightly decreased
1990 – gold price stayed nearly constant, oil price considerably decreased
2001 – gold price stayed nearly the same, oil price decreased
2008 – gold price increased, oil price significantly decreased
According to this graph, generally, during recessions oil drops while gold either stays the same or increases.
Where we are now
Discussed above is history but it may help draw conclusions about the present times.
In the last few years, are there any sharp spikes similar to those observed in the past? Yes, there are two.
The first one was an increase of 12 barrels of oil from October of 2014 to January of 2015. This period approximately coincides with the time when oil started to drop in 2014. The second spike happened exactly one year later. Again, it went up by about 12 barrels from October of 2015 to January of 2016.
Figure 4. Left = # of barrels of oil you can buy with one 1 ounce of gold
Does one of these two spikes indicate a recession? Not easy to answer. That’s because in the past there were a few large spikes during a recession-free time, so it cannot be said for sure that gold to oil price ratio necessary marks the time of recession. However, on the other hand, this is just about the time for the next recession. Moreover, closer to the end of 2015, central banks announced that the global economy is indeed in recession. Okay then, if the second spike did indicate a recession, then according to the observed pattern in earlier recessions, the spike should have marked the end of it.
Does it mean that the recession has already passed then? It might. However, if you look at the graphs, after 1970s, during recession-free time the ratio usually only moderately decreases and increases. Sometimes there are large drops and rises but they happen over considerable length of time. Such behavior cannot be observed after January of 2016 as drops and rises are much larger, however more time is needed.
Also, some things to consider before deciding that the recession had ended or never begun at all. In the last 80 years, there has never been such a time when you can buy so much oil with one ounce of gold. Moreover, there has never been such a time when gold to oil price ratio spikes were spaced so close to each other. And to conclude, the 2008 crisis is considered the worst since the great depression, yet, the spikes of 2015 and 2016 are almost identical to the one in 2008…
Figure 5. Left = # of barrels of oil you can buy with one 1 ounce of gold
Does it mean that we are still in recession and its end is yet to be marked by another spike? Will it be larger than the last two spikes? Maybe. Maybe not. Who knows. Time will show.
To conclude, Michael Snyder is definitely correct. Gold to oil price ratio does increase during recessions which is clearly evident by the above graphs. Definitely the above graphs give some food for thought. Especially the last two.
I hope the above analysis makes sense. If you have another opinion, leave it here.
Main references:
www.macrotrends.net/1380/gold-to-oil-ratio-historical-chart (graphs)
www.macrotrends.net/1334/gold-prices-vs-oil-prices-historical-correlation (graphs)
www.econmatters.com/2016/01/the-oil-crash-of-2016-has-big-banks.html
www.freedomoutpost.com/the-numbers-say-that-a-major-global-recession-has-already-begun/#menu1