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 $2,000.00 T/oz.
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.