The gold-to-oil ratio has hit a historic 55! Which is rare, a sign of warning of upcoming financial stress. Those who are unaware of the Gold to Oil ratio, it’s a simple yet powerful economic indicator. It shows how many barrels of oil you can buy using 1 ounce of gold only. It’s not something that you can ignore for now. Historically, whenever the ratio has been high, the world has witnessed major shifts and downturns in most cases.

But why is gold rising and oil falling?

The condition of a high Gold to Oil ratio is that Gold is gaining ground and outperforming oil, either by a rise in the price of gold or a drop in the price of oil, or both. Currently, it’s due to both situations. Gold price is rising; on the other hand, oil price is dropping.

Gold prices rise significantly when investors and banks lose confidence in the market and economy in general. Central banks also started to reserve gold, which spikes the price of Gold. Cherry on top, the weakening dollar also hyped the gold prices by making the metal more affordable. Oil prices, on the other hand, are falling because of the overproduction of oil, which is surpassing the demand.

What’s the message for the market?

Investors take shelter in gold when they distrust the market and fear a financial downturn. There is already a lot of macroeconomic chaos due to Trump’s tariff drama and a sudden stock market crash. Oil price increases when the economy seems healthy, businesses are running without stress, and the economy is stimulated.

A decrease in oil prices signifies and soaring gold prices suggest investors are seriously risk-averse, which leads to less active economy.

Most recently, in 2020, the gold to oil ratio was 90, an all-time high when the equity market crashed hard. Given the history, it makes sense that the market will act more conservatively.

What does it mean for the global economy?

A rate cut is possible: If the Fed decides to cut the rate to stimulate the economy and supply for liquid in the market, it may further weaken the dollar. President Trump is favoring rate cuts and proposing policies which may weaken the dollar.

Weakening dollars make it even harder. Weak dollar will only increase the demand for gold, and the ratio will keep climbing. Due to oversupply, it is less likely that oil prices will keep up with that unless OPEC decides to cut production aggressively.

Emerging markets may suffer: Poor oil exporter countries like Nigeria, Angola are going to be the worst victims of this situation. A significant drop in the well price can put more pressure on their budget to balance. Heightened sovereign risk can force rating agencies to downgrade these countries’ ratings.

What does it mean for Bangladesh?

Short-term reliefs: A Decrease in the oil price is likely to decrease the energy import bills.

Foreign reserves and exports may suffer: If investors don’t invest and businesses slow down globally, then it will be harder for Bangladesh to maintain its export growth, and revenue could plummet. In the worst case, foreign reserves may suffer due to decreased revenue.

Rise in Inflation: A Surge in the price of gold leads to a higher inflation rate.

Depreciation of Taka: If the dollar keeps weakening, then BDT will also depreciate due to the crawling peg system. If the dollar loses its value, BDT has to compensate for it by degrading its value.

Remittance inflow is a bit tricky: On pen and paper, Remittance inflow increases when the gold price rises, but these Gulf countries could be a victim due to oil demand. If so, then a lot of Bangladeshi Sis will struggle to keep up with their jobs, which can negatively affect remittance inflow.

Why should you care as an Investor?

Not losing money and being conservative could be a wise idea. Energy sectors could underperform, and demand for EVs could come down as well. Look into defensive stocks such as Healthcare and utilities/consumer staples.