Newsletter: Gold Ratios as Stock Market Predictors

How gold, oil, and Bitcoin ratios help forecast returns

The ratio of gold prices to other asset classes has been shown to be a useful predictor of stock market returns. In this issue, we discussed several gold-based ratios and how they can be used to forecast equity market performance.

Web-only posts Recap

Below is a summary of the web-only posts I published during last week.

Using Equity Options to Hedge Credit Risks

Evaluating Trading Strategies Using Economic Criteria

Filtering Stocks Based on Volatilities

Speeding Up Derivatives Pricing Using Machine Learning

Factor Investing With Timing

Can Credit Growth and The Yield Curve Predict Financial Crises?

Gold Oil Price Ratio As a Predictor of Stock Market Returns

Analyzing intermarket relationships between assets can help identify trends and predict returns. Traditionally, analysts use commodity, currency, and interest-rate data to predict the direction of the stock market. In this regard, Reference [1] brings a fresh new perspective. It utilizes price ratios of gold over other assets in order to forecast stock market returns.

Findings

-The gold-oil price ratio (GO) is shown to be a strong predictor of future stock market returns.

-Researchers created ten different gold price ratios by comparing gold to various assets like oil, silver, CPI, corn, copper, and several financial indicators.

-They used statistical models (univariate and bivariate regressions) to test how well these ratios could predict U.S. stock returns.

-Among all the ratios tested, the gold-oil ratio (GO) had the highest predictive power.

-A one standard deviation increase in the GO ratio is linked to a 6.60% rise in annual excess stock returns for the following month.

-The GO ratio performs better than traditional forecasting methods, including the historical average model.

-It also offers meaningful economic benefits for investors who use mean-variance strategies.

-The study concludes that the predictive ability of the GO ratio is both statistically reliable and economically useful.

In summary, the gold-oil price ratio is identified as a robust predictor of stock market returns, outperforming traditional predictors and other gold price ratios. A one standard deviation increase in GO is associated with a significant 6.60% increase in annual excess returns for the next month.

Reference

[1] T. Fang, Z. Su, and L Yin, Gold price ratios and aggregate stock returns, SSRN 3950940

The Bitcoin-Gold Ratio as a Predictor of Stock Market Returns

The ratio of gold prices to other asset classes has been shown to be a useful predictor of stock market returns. The previous article discussed how the gold-oil ratio serves as one such indicator.

Continuing this line of inquiry, Reference [2] examines the informational value of the Bitcoin-gold (BG) price ratio. The logic behind this metric is that Bitcoin represents a high-risk asset, whereas gold is traditionally viewed as a safe haven. Therefore, a rising BG ratio may signal increased investor risk appetite. It may also reflect growing optimism and interest in technological innovation, which boosts demand for Bitcoin. As a result, a higher BG ratio can indicate a tech-driven risk appetite that translates into stronger stock returns.

Findings

-The Bitcoin-Gold (BG) ratio is positively linked to U.S. stock market returns, especially during and after the COVID-19 pandemic.

-A rising BG ratio suggests increased investor risk appetite, as Bitcoin is seen as high-risk and gold as a safe haven.

-The effect of the BG ratio on stock returns remains strong even when using Ethereum instead of Bitcoin, showing broader crypto-gold relevance.

-The positive impact of the BG ratio also applies to the European stock market, not just the U.S., indicating global relevance.

-The main channel through which the BG ratio affects stock returns is investor risk aversion or appetite.

-The study uses various economic controls, like volatility, inflation, and liquidity, and still finds the results hold strong.

-There was no significant impact of the BG ratio on stock returns before the pandemic, suggesting this relationship is more recent.

-The BG ratio reflects shifts in market sentiment and offers a new tool for gauging investor behavior.

-Investors can use the BG ratio as a signal to adjust their equity exposure based on prevailing market conditions.

In summary, the paper makes a novel contribution by introducing crypto-gold ratios as reliable indicators of stock market direction across multiple regions.

Reference

[2] Elie Bouri, Ender Demir, Bitcoin-to-gold ratio and stock market returns, Finance Research Letters (2025) 107456

Closing Thoughts

Both studies show that gold price ratios can offer valuable insights into stock market returns. The gold-oil ratio (GO) stands out as a strong, traditional predictor, while the Bitcoin-gold ratio (BG) brings a modern twist by capturing shifts in investor risk appetite. Together, these findings suggest that combining safe-haven and risk assets in a ratio form can help investors better understand and respond to changing market conditions.

Educational Video

What is the Oil-Gold Ratio?

This video provides more explanation for the use of the oil-gold ratio. The oil-gold ratio shows how many barrels of oil can be bought with one ounce of gold, with a long-term average of 16:1. A rising ratio often signals inflation, economic slowdown, and investor uncertainty. A low ratio suggests weak economic health, falling oil prices, and rising demand for gold as a safe haven, indicating a possible upcoming recession.

Around the Quantosphere

- Copying Saylor’s Bitcoin Strategy Isn’t Working Like It Used To (bloomberg)

- We have ‘surrendered more to the machines’, says quant fund titan Cliff Asness (ft)

- The apocalypse is always on the horizon': Inside $18 billion CFM's evolution to quant giant (businessinsider)

- Quant Traders That Dominate US Options Market Move In on Europe (bloomberg)

- Multi-strategy giants post modest May gains despite S&P 500-driven market rally (hedgeweek)

- "I'm an M&A MD at a US bank. I used these tricks to convert my internship" (efinancialcareers)

Recent Newsletters

Below is a summary of the weekly newsletters I sent out recently

-Volatility of Volatility: Insights from VVIX (11 min)

-Simplicity or Complexity? Rethinking Trading Models in the Age of AI and Machine Learning (10 min)

-Low-Volatility Stocks: Reducing Risk Without Sacrificing Returns (11 min)

-The Calendar Effects in Volatility Risk Premium (9 min)

-Stock-Bond Correlation: What Drives It and How to Predict It (10 min)

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