Gold has a long history as a benchmark of value and purchasing power across the world. Many modern forecasters now study the correlations between the price of gold and a number of other commodities and assets, including oil. Notably, in the past few years, gold’s relationship to oil has undergone some reinterpretation.
A Complex Financial World
As a recent article in Bloomberg points out, the current complexities of world finance have turned the expected relationship between oil and gold prices “on its head.” The rapid drop in crude prices has taken the world aback, while ongoing instability in many areas of the world makes gold bullion a comforting investment.
The initial drop in the price of oil last year spurred a widespread focus on the multiple benefits to the world economy when fuel is cheap. These advantages initially overweighed the other concerns in the market. Up until December of last year, there was a close correlation between the prices of both oil and gold. However, that correlation is now less clear as many market-followers are more concerned about potential economic troubles, including potential deflation.
Even with the most recent recovery from the bottom point, the price for oil has now declined so low there is concern about it actually harming the world economy, rather than serving as a booster to it. Likewise, there is growing concern that governments in Asia and Europe will yield to the calls for additional stimulus spending that will create more mid to long-term inflationary pressures. Combined, this creates an extremely unusual situation where concerns over both inflation and deflation exist in different sections of the marketplace.
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The Benchmark Ratio
The uniqueness of the current situation thus finds may traders buying gold—to secure purchasing power protection for both inflationary and deflationary scenarios. As the preferred safe-haven asset, gold is on the minds of many different gold investors and traders today.
At the same time, the turmoil in the Middle East adds to the complexity of the pricing equation. The unprecedented increase in U.S. supplies of crude makes it difficult to develop any scenario for pricing that does not carry an equally valid counter-scenario of rising or falling prices, making it difficult to predict future crude.
The historical tracking of roughly a 15:1 ratio between gold and oil, going back to the 1940s, has seen some cycles that briefly went in different directions, most notably in the late 1980s and 1990s. However, those deviations were created by multiple factors different from those faced by the market today.
Experts are busily attempting to extrapolate the trends in the relationship between these two commodities in today’s confusing marketplace. Using the benchmark ratio of 15:1 currently provides little guidance as to whether low oil prices will continue to affect the upward trend in gold prices. However, there seems to be little doubt that the numerous other underlying dynamics supporting gold will keep the yellow metal from being fully influenced in a negative direction by the current drop in oil prices.