Forget crude, gold now measures the world's economic anxiety

Copyright © HT Digital Streams Limited All rights reserved. Gold and oil prices are both barometers of risk: gold reacts to general economic anxiety, and oil to concerns about growth or oil supplies. (AI generated image) Summary The price of gold has skyrocketed and is now over $4000 per ounce. However, what is surprising is the opposite reaction of oil—the price of crude oil has fallen by more than 40% since early 2022. Reserve Bank of India Governor Sanjay Malhotra recently noted that gold has replaced oil as the barometer of economic uncertainty. In an economic landscape clouded by uncertainty — tariff flip-flops, shaky supply chains, rising protectionism, a falling dollar, simmering conflicts and threatened trade relations — the only constant is change. Not surprisingly, investors are hoarding gold. The price of gold has soared and is now over $4,000 an ounce. However, what is surprising is the opposite reaction of oil – the price of crude oil has fallen by more than 40% since early 2022, when it crossed $100 a barrel in the wake of the Russian invasion of Ukraine. Oil markets do not seem to price uncertainty in the same way as gold. Historical risk barometers Historically, there has been a large degree of co-movement between gold and oil prices, especially in times of crisis. The relationship is not perfect – there are leads and delays, and even the occasional divergence. Gold prices barely moved when Iraq invaded Kuwait in 1990, but oil prices soared. Likewise, as the global financial crisis unfolded from September 2008, gold was more stable than oil. In 2014–2016, oil prices fell as US shale production led to a supply glut, but gold prices were range-bound. Despite these episodes, both prices usually react sharply to global uncertainty. Gold is a safe haven asset; its price rises in times of inflation, war, pandemics or geopolitical uncertainty. The price of crude oil is linked to supply and demand; it declines when economic activity slows, as slower growth means lower demand for fuel. Therefore, gold and oil prices are both barometers of risk: gold reacts to general economic anxiety, and oil to concerns about growth or oil supplies. Rising gold-oil ratio The gold-oil ratio is the ratio of the price of gold to the price of oil; both are measured in US dollars. When uncertainty is high and global growth is at risk, the price of gold soars and the price of oil falls; so, the gold-oil ratio rises. This happened during the pandemic: the ratio peaked as global shutdowns sharply reduced oil demand and price, and uncertainty increased demand for gold. Currently, the ratio is around 68, implying that markets value an ounce of gold as equivalent to 68 barrels of oil. This is a big jump from June 2022, when the ratio was 15.9. Since then, the price of gold has more than doubled, and the cost of oil has halved; thus the gold-oil ratio quadrupled. The rising ratio reflects unusually high uncertainty stemming from continued geopolitical risk as well as concerns about global growth. The upward cycle shows no sign of ending, which speaks volumes for the shift to gold as a hedge against uncertainty. Back to average? The gold-oil ratio is considered a crisis predictor – with each upward cycle associated with periods of economic and/or political uncertainty. Data spanning nearly half a century (1978–2025) indicate that although the gold-oil ratio fluctuates widely, it tends to revert to its long-term mean (mean). In fact, 40% of the observations lie between 16 and 25, around the average (mean) of 18.6. Based on past trends, can it be concluded that the current ratio will eventually decline to more normal levels? For the gold-oil ratio to fall, we need a fall in the price of gold, a rise in the price of oil, or a combination of the two. Gold prices could ease if, for example, the US and China negotiate a mutually acceptable trade agreement on tariffs. But oil prices may not rise that much, even with the easing of trade uncertainty. This is because the relationship between oil price and uncertainty has weakened. Oil Demand Dynamics Oil markets are going through a transformation. Between 2015 and 2024, 90% of the increase in oil supplies came from the US shale boom, and 60% of the increase in oil demand came from China, according to the International Energy Agency. The two giant economies complemented each other perfectly. But China’s push for electric vehicles means it has become less dependent on oil. At the same time, the pace of investment in new US shale capacity is slowing. So, future demand-supply dynamics will be very different. Global demand for oil is expected to flatten in response to slower growth and the replacement of oil with renewable energy. Demand from emerging markets will remain robust, but demand from developed countries in North America and Europe is expected to contract well before 2030. The traditional link between GDP growth and oil demand also appears to be breaking down: from 2027, global growth is expected to not contribute as much to the demand for oil as it is increasingly replaced by other fuels. Gold beats black gold In its heyday in the seventies, oil was known as black gold for its essential role in fueling economic activity. While oil remains an important energy source, its influence has declined. In 2024, the share of oil in total energy demand has fallen below 30%, from a peak of 46% fifty years ago. Meanwhile, gold has become the best asset for investors, not only as a hedge against inflation and geopolitical risk, but also as an alternative to fiat currency debased by debt and deficits. So, while most indices of economic policy uncertainty have eased slightly from their April peaks, gold prices continue to rise. View full image. The shift to gold is broad based. Retail investors buy gold exchange-traded funds, central banks buy gold and institutions advise clients to take exposure to gold. Additionally, the recent escalation of trade tensions between the US and China has added to gold’s appeal. As legendary investor Warren Buffett said, by buying gold, “investors go long on fear”. The author is an independent writer in economics and finance. Get all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download the Mint News app to get daily market updates. more topics #Oil prices #inflation #plain-facts #in graphs Read next story