The Connection
Between Gold Prices and Oil Prices
Do gold prices and oil prices have anything
to do with each other? This question has
recently been asked by several Wall Street
investors trying to figure out what hot
commodity they should buy.
With oil prices threatening to breach
the $150 per barrel mark, the world’s
financial markets braced for potential
disaster. The price per barrel has been
down as of late, which has investors asking, “What
is going on with the price of oil”?
With oil being down approximately 17% from
it’s climax, is now the time to buy
oil, or should you sell your oil and buy
gold?
The relationship between the cost of gold
and the price of oil is not an obvious
one at first glance. With the supply of
oil remaining vulnerable, it would appear
that it may be a good time to buy oil,
but consider this: higher oil prices fuel
inflation since most of the demand for
oil is inelastic. Also consider that gold
is a kind of proxy currency. In the 1900’s,
there were several countries across the
world that had gold standards. Now, if
we used gold as our current form of currency,
how much gold would we require to purchase
a barrel of crude oil? Or, on the other
hand, how many barrels would it take of
crude oil to purchase an ounce of gold?
It would take about 7.2 barrels of crude
oil to get an ounce of gold.
The dollar’s purchasing power has
spiraled downward, but why? This is mainly
due to inflation. As time goes by, currencies
(such as the dollar) lose its worth in
oil, but gold is different. It stores its
value so it gets used to hedge inflation.
Since the 1980’s, crude oil has
jumped from $38 to the $120’s. The
price of gold has only changed by approximately
10%. So, using the oil-gold ratio, either
crude oil needs to go down to $65 or the
cost of gold need to move up to
$1,700.00.
It appears that neither of these will
be happening soon, but next time you are
looking to purchase one of these hot commodities,
you can look at the other for insight.
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