An Ounce of Gold Buys Most Barrels of Oil Since January 2007

While gold has partaken in the fall of commodities, it has held better than most during the worldwide credit crisis. Even so, it has dropped by 16 percent since October when large funds started to deleverage their positions.

One of the measures used to measure the purchasing power of gold is how many barrels of oil it can buy. As of Friday, it bought 12 barrels of oil per ounce of gold, the strongest performance since January 2007.

When oil reached close to $150 a barrel in July, the ratio of gold-to-oil dropped to 6.6. Over the long haul the average ratio comes in at close to 15.

The normal historic behavior of gold in relationship to oil is rise in price along with it, usually performing as an inflation hedge.

With consumer demand falling and companies cutting back on purchases, gold has also risen against metals like copper and nickel. The gold-to-nickel ratio is another indicator used to measure economic performance, and last month Deutsche Bank asserted it could fall into single digits if economic conditions continue to worsen.

As tight credit markets ease, we should see gold return to its usual use as an inflation hedge and flight to safety. So far inflation has been somewhat contained, but the inevitable printing of more money to fund all the billions in bailouts will put upward pressure on prices of goods and services.

In the short term safety will be the key issue driving gold prices as more liguidity enters the markets. Liquidity is the key driver now, not safety.

So far this year gold has fallen by 12 percent, while crude oil has plunged 36 percent.