In recent weeks, oil prices hit levels not seen since 2014. The price for a barrel of West Texas Intermediate (WTI) crude oil for March delivery on the New York Mercantile Exchange (NYMEX) hit $66.66, while the Brent crude equivalent contract surged to over $70 a barrel in London. 1 Oil prices have been moving higher since October 2017, and there has been a gold rally in recent months as well. 2 What is the relationship between oil and gold prices?
Weak Dollar
As a commodity priced in dollars, oil has generally had an inverse correlation to the dollar. 3 Logically, this makes perfect sense, since a weak dollar gives consumers outside of the U.S. greater buying power in dollars, thus making oil relatively cheaper for them, thereby increasing demand for oil, which in turn drives up prices.
Increased U.S. oil production from the shale revolution has exacerbated this trend. As the country has shifted from a net importer to a net exporter and moves towards becoming a top-ten exporter by 2020, a cheaper dollar means increased demand for U.S. exports, which in turn puts even greater upward pressure on oil prices. 4 As such, the falling dollar value that has buoyed gold in recent months has also done much to increase the price of oil.
Commodities Correlation
Oil is the most heavily traded of all the commodities and therefore movements in the oil market have a tendency to bleed over into other commodities that are priced in dollars. 5 While we’re not aware of a study that shows a 1:1 correlation between oil and any of the other non-petroleum-based commodities, significant research exists that finds a directional correlation. 6 In other words, when oil moves up, most of the commodities complex moves too, and when it moves down, so do many other commodities. Interestingly, however, gold prices appear to be more resistant on the downside than they are positively affected on the upside. 7
Oil and Gold Prices
Oil is, in a sense, leading the way up for the commodities complex, including gold and other precious metals. As long as this relationship maintains, expect significant upward pressure to be added to the already bullish conditions for gold prices. The OPEC nations, led by Saudi Arabia, tried and failed to wipe out U.S. shale oil production by glutting the market with oil over the past few years, but since shale oil production is easy to stop and re-start, the OPEC gambit, in the end, caused OPEC countries more pain than it did to U.S. shale producers. 8 9 Oil prices are set to rise in 2018 and take precious metals prices with them.