After an earlier post discussing the relationship between the S&P-500 and the price of gold, I received a number of questions on how “black gold” (i.e., oil) might play into the analysis.

The chart below shows a comparison of these two popular commodity indicators.  The chart shows a very long-term view (going back to 1945) of how many barrels of oil could be purchased for a single ounce of gold.

This number is essentially the number of barrels of oil it takes to purchase an ounce of gold.  It was as high as 34 barrels in the mid-’70s and as low as 7 barrels in the past decade prior to gold’s recent run-up in price.  This ratio has frankly shown itself to be quite erratic so coming up with a definition of “normal” seems a bit of a stretch; however, I’ll try anyway :-).

There seems to be a tendency for the relatively wide range of 8 to 20 barrels of oil per ounce of gold with an average around 14 barrels.  For the decades after World War II, it hovered relatively consistently around 12 barrels.

We are currently sitting at roughly 16 barrels, certainly within that long-term range, but above the longer-term average of 14.

It’s interesting to note that oil is not a persistent commodity; that is, at some point, there will be no more oil since it is actually consumed and turned into energy.  Gold, on the other hand, retains its identity as gold irrespective of use.

The big question, then, is will we hit a point, as oil supplies start to show clear signs of exhaustion, that oil prices will skyrocket until its completely consumed or will we be able to transition to an alternative energy source in time?