Soaring Gold-Oil Ratio Heralds Imminent US Recession and Sounds Alarm on Commodity Market

Recently, a number of key indicators point to a recession in the US economy, and the latest ominous signal comes from the commodity market.

Analyst Nour Al Ali recently wrote that at a time when uncertainty over whether the Fed is about to end its tightening cycle hangs over the market, the gold-oil ratio suggests commodity traders are hedging against the risk of a US recession.

As oil prices fall and gold prices rise, the gold-oil ratio has soared to nearly 24, well above the average of less than 17 since 2000. Some market participants see the significantly higher-than-average gold-oil ratio as a warning sign of an impending recession.

In times of economic recession, investors tend to abandon oil and buy gold. Therefore, the gold-oil ratio is regarded as a barometer of the global economic situation. A rise in the ratio indicates that investors are preparing for an economic recession. The ratio has been on the rise since mid-2022 and surged in late March when a banking crisis boosted gold's safe-haven appeal.

The last time the gold-oil ratio fluctuated wildly was in 2020, when the COVID-19 pandemic swept through the global economy, pushing up gold prices while crude oil prices fell.

Al Ali noted that historically, gold has tended to outperform oil at the start of a recession or when there is great uncertainty, such as during the global financial crisis, the recession of the early 1990s, and even during the so-called mini-recession triggered by the oil price war between Saudi Arabia and the United States in 2015-2016.

For the future trend of the gold-oil ratio, when the Fed stops raising interest rates is crucial. Uncertainty over the Fed's rate path and a potential recession could push the rate even higher.

It is generally believed that once the gold-oil ratio exceeds 25, the possibility of a global recession will rise sharply.