For a while now, the government’s eyes have been on the gold that glitters in your bank locker. Hand it over as part of the gold monetisation scheme and you get regular interest payments in return, converting an unproductive asset into something that earns you money.
The government is pleased because freeing up at least some domestic gold – at 20,000 tonnes, India has the world’s largest stash – should reduce imports.
In fact, it’s the season for contentment. Believe it or not, a litre of crude oil now costs less than a litre of bottled water – a barrel that holds 160 litres costs $27, or Rs 1,836. That’s Rs 11.50 a litre.
More to the point – unless you have a refinery at home, a litre of petrol in Delhi is just three to four times costlier than a bottle of water depending on the brand you buy.
The link between these two top-of-the-mind commodities is an intriguing relationship that is sometimes predictive of economic movements.
Welcome to the gold-to-oil ratio, an old chestnut for market watchers but something that’s regaining prominence because it is hitting all-time highs. In other words, if, instead of handing your yellow metal over to the government you opted to buy a barrel of oil with it, you would get more barrels of oil per ounce of gold now than at any time in the past.
With gold trading at $1,100 per ounce and oil at $27, the ratio is now just over 40. This is abnormally high and is causing some nervousness among market watchers because a rise in the ratio usually presages some crisis in the global economy.
Investors buy gold in times of trouble, hence its “safe haven” reputation. It’s a hedge against inflation, tending to move up along with oil because high oil prices lead to inflation. The gold-to-oil ratio typically moves in a narrow range, and its long-run average is about 15.
This time, though, the ratio is getting skewed because oil is falling sharply, driven by wilfully high Saudi output, the shale revolution and the return of Iran to the market – coupled with poor offtake in markets like China. So it’s not necessary that a crisis is around the corner: It might have been if the ratio was being driven up by high gold prices instead.
The absence of a crisis would suggest no massive spike in the price of gold. If that’s right, it would then make sense to tender your gold into the government scheme.
Of course, there are caveats. The gold scheme needs to overcome Indians’ attachment to the metal in the form of jewellery – what you get back when the scheme matures is an equivalent amount of gold, not the beloved necklace you tendered. And correlations, let alone their predictive force, are open to question anyway: For example, a rise in the number of bearded men in a country doesn’t necessarily mean that the economy is slowing because more people are too poor to shave.