A reader recently wrote in with kudos for our April article on the gold/oil ratio ("How Much Oil Can Gold Buy?"). The ratio, if you're not familiar with it, measures gold's purchasing power in barrels of crude.

That got me thinking about what else gold can buy. Gold is constantly advertised as an inflation hedge, so many people think that owning the metal provides constant insulation from the ravages of rising consumer prices.

Year-by-year through 2008, it turns out crude oil has actually beaten gold at the inflation game, at least when measured against the Consumer Price Index (CPI). In a way, this makes perfect sense, since so much of present-day inflation stems from petroleum costs. 2009 may break oil's record, but we'll get to that in a minute.

Let's look at the macro picture first - or, rather, pictures. For our analysis, we'll use average yearly prices over the past four decades, so we'll be sure to encompass both the pre- and post-Nixon markets (remember, it was on Richard Nixon's watch that the Bretton Woods scheme was scuttled, decoupling the U.S. dollar from gold).

The 1970s were, to say the least, inflationary. From a $39 average price in 1968, gold climbed to a 1980 peak of $615, where it then languished for two decades. The gold market finally sparked to life in the early days of the new millennium, when, in 2007, gold ripped through its 1980 high. Since then, prices have continued to rise: Gold's average price in 2008 was $872.

Long-Term Appreciation: Gold Vs. Oil

Source: IOGA, LBMA, BLS

Through 2008, oil's price trajectory looks fairly similar to gold's. Crude peaked at an average price of $91 a barrel last year.

Apparently, oil, which had played the weak sister to gold in the early days of the new millennium, has now outpaced the yellow metal.

What's more, these price charts don't reflect the impact of inflation on gold and oil prices. Factor that into the mix, and you'll discover that neither gold nor oil has really smoked their old highs. Inflating the commodities' historic prices to 2009 dollars tells us that gold needs to average $1,607 this year to match its 1980 performance. That's an 84% jump - a pretty tall order to be sure.

For oil, the bar was set a lot lower this year. To match its 1980 performance, oil would only need to average $98 a barrel, just 8% above its 2008 price. Whether or not that will come to pass is another matter.

Inflation-Adjusted Appreciation: Gold Vs. Oil

Source: IOGA, LBMA, BLS

Keep in mind that the charts depict the compound performance of these two commodities since 1968. If you look at their performance on a year-by-year basis, things look a bit different. The CPI adjustment factor used in these charts rarely backtracks: Inflation is the norm, deflation the exception. The average annual inflation rate since 1968 has been 3.6%, and there's nary a negative year to be seen. So far, at least.

The median annual outperformance of gold to CPI is 1%. Oil does a bit better, albeit by a slim margin. Oil's annual gains were 1.7% better than CPI's.

Now, before you rush out to buy oil ETFs or ETNs, take note of this: Oil's taken a beating in 2009. The average price of crude now is about half of what it was last year. Gold, however, hasn't given up ground; in fact, it's on pace to show a gain for the year. Whether things will turn around by year's end is an open question.

But that brings us full circle to the gold/oil ratio. When it comes time to hedge inflation, the ratio provides some clues as to the better hedge. Gold is ascendant when the ratio turns up from a bottom; oil has the advantage when the ratio turns down from a top.

Happy hedging.