- Gold and silver prices are melting up, whereas crude oil is going nowhere fast
- One ounce of gold now buys more than 75 barrels of oil, compared to a post-1970 average of 18 barrels
- One ounce of silver now buys 1.65 barrels of oil, an all-time high
“Gold and silver prices continue to melt up, and copper, tin and palladium are surging too, but the difficulty now for investors lies in deciding whether a commodity is ‘expensive’ or ‘cheap,’ not least because of the absence of any cash flow from the asset. Therefore, one means of judging their value is to gauge what you could use them to buy,” says AJ Bell investment director Russ Mould.
“In this respect, oil looks very cheap relative to both silver and gold, at least based on the number of barrels of crude that an ounce of the precious metals would currently buy relative to their history, and perhaps the next leg of the commodity bull cycle, if indeed that is what it is, will focus on Brent and West Texas Intermediate.
“Given how crude prices have dribbled lower for most of the past three years, after the initial panic caused by Russia’s invasion of Ukraine in spring 2022, this seems unlikely right now, especially given the momentum that gold and silver continue to generate.
Source: LSEG Refinitiv data
“But successfully investing can be about assessing what is cheap and unloved now, why that may be and what could make it change, not least as the more depressed an asset, the less good news it may take for perception to change. Indeed, it may simply require the flow of bad news to slow down and become marginally less bad.
Source: LSEG Refinitiv data
“For now, the International Energy Agency (IEA) continues to assert that the oil market is oversupplied, thanks to increased output from US shale and an easing of production cuts from OPEC+, as well as relatively modest global economic growth.
“But geopolitics could yet threaten supply (especially in the Middle East), Russian output is likely to remain beyond the pale for some time to come and demand continues to grow, at around 103 million barrels a day on average. If prices stay depressed, and politicians, environmental campaigners and the public alike continue to clamour for greater investment in renewables and less in hydrocarbons, then output growth is likely to stall, owing to meagre returns for producers. The best cure for low prices is low prices, after all.
“It therefore only takes a little imagination to see how the picture could change, even if it feels unlikely now. And, as gold and silver surge higher, both precious metals are trading at or above record highs, and certainly their long-term averages, relative to oil.
“Since 1970, one ounce of gold has bought, on average, 18 barrels of oil. Today, one ounce of the precious metal would purchase 77 barrels of crude.
Source: LSEG Refinitiv data
“The gold-to-oil ratio has only surpassed 40 times on three occasions in the past 56 years – 1986, 2016 and 2020. The last-named occasion was due to Covid and lockdowns, which left the world awash with oil and racked with worries about where to store the stuff.
“On all three past occasions when an ounce of gold would have paid for more than 40 barrels of crude, that ratio did not last long. Moreover, on all three occasions, the price of oil was much higher just 12 months after the gold-to-oil ratio hit 40 for the first time. The ratio then fell sharply, as oil powered high and gold added to already healthy gains.
Source: LSEG Refinitiv data
“The current surge in silver looks similarly dramatic. One ounce of silver currently buys a record high of 1.65 barrels of oil, compared to a post-1970 average just one third of a barrel of crude.
Source: LSEG Refinitiv data
“History also suggests that a 0.8 times silver-to-oil ratio can prove to be a relatively short-lived high. Again, Covid and lockdowns and a collapse in the oil price explain the 2021 advance in silver relative to oil, while the efforts by the brothers, Lamar and Nelson Bunker Hunt, to corner the silver market squeezed up the metal’s price to what proved to be unsustainable levels as the 1970s turned into the 1980s.
Source: LSEG Refinitiv data
“By the time the Hunt brothers’ shenanigans came to an end, on Silver Tuesday in January 1980, silver stood at $49.5 an ounce, enough to buy 1.2 barrels of oil. One year after that peak in the precious metal, oil was flat at $40.5, silver was down 70% to barely $15 an ounce and the silver-to-oil ratio had retreated to 0.37 times.
“The past offers absolutely no guarantee for the future but will be interesting to see if we get any echoes, especially as investors seem to be largely giving up on oil-producing companies, judging by how the aggregate stock market capitalisation of the S&P Global 1200 Energy stands near record lows as a percentage of the total market valuation of the wider S&P Global 1200 benchmark, and way below the 25-year average of 7.7%.
Source: LSEG Refinitiv data
“Even more stunningly, the 50 Energy producers in the sub-index have a combined market capitalisation of just under $3 trillion, less than any of Nvidia, Alphabet, Apple or Microsoft on their own – each of them carries a stock market valuation of at least $3.5 trillion.”
