Do Oil Prices Determine Gold Prices?

man operating a valve at an oil rig

Understanding gold prices is crucial whether you are a seasoned investor or new to the market. Historically, gold and oil prices have maintained a parallel relationship.

We can see this relationship expressed throughout various parts of history, including the simultaneous gold and oil price drops in the 1980s and 1990s.

Although we can track the historical relationship and patterns between gold and oil, narrowing down what factors tie these two commodities together proves challenging.

While some professionals credit the price of gold to the market actions of oil, we must also consider several other factors.

The relationship between oil and gold prices is far from straightforward. Below, you’ll find an analysis of the relationship between gold and crude oil prices and how they affect potential investments.

The Relationship Between Gold and Oil Prices

While oil prices tend to be more volatile, they positively correlate with gold prices. Many people argue that oil prices determine or at least predict gold price changes.

Although there is some truth to this, it is not such a simple answer.

The journal Economic Research published an article in 2017 stating that the increase in oil prices leads to a decrease in disposable income. As a result, consumers are more likely to experience inflation, which leads to increasing gold prices.

The research suggests that a change in crude oil prices can often predict gold price changes. Generally, oil and gold prices increase and decrease at similar rates.

However, this does not necessarily indicate that one price dictates the other. This is simply a correlation, not evidence of cause and effect.

According to a Kitco contributor named Mickey Fulp, various factors can lead to a change in oil and gold prices, including:

  • Economic uncertainty
  • Global economy health
  • Geopolitical activities or events that can impact the oil supply
  • Fundamentals of supply and demand
  • Trading gold or oil commodities through futures, ETFs, and other means
  • Purchasing and selling gold through central banks

With so many factors contributing to oil and gold price changes, narrowing down which specific factors connect the two commodities is challenging.

However, market analysts use these factors to track the price behavior of gold and oil and attempt to make more informed decisions.

The Historical Relationship Between Gold and Oil Prices and the US Dollar

oil barrels and stack of gold coins beside each other

One factor that remains constant in the price fluctuations of both gold and oil is the US dollar; as the value of the US dollar increases, gold and oil prices tend to decrease.

Although gold and oil tend to have parallel price behaviors, their relationship is anything but simple. For example, oil has greater volatility, as its prices primarily rely on the supply and demand balance.

On the other hand, gold tends to hold its value during various market fluctuations, making it a safe haven asset.

Inflation Argument

Many people argue that inflation serves as the primary cause of simultaneous oil and gold price increases.

As previously mentioned, the two commodities tend to have similar price actions when the US dollar increases; however, many experts debate that inflation is not the sole or primary culprit of gold and oil price increases.

An increase in oil prices tends to lead to inflation, leading to higher gold prices. When this happens, the rise of oil prices is the main cause of higher gold prices.

The fact that gold and oil prices have similar marketplace pricing actions does not necessarily denote that they rely on or impact each other.

Instead, they share several price-altering variables, which could cause them to have a striking correlation.

Commodities Argument

Some market analysts argue that oil prices can predict gold prices due to having similar traits. For example, gold and oil use raw materials, making them commodities.

Since the balance of supply and demand significantly impacts commodity prices, oil and gold prices will have similar behaviors.

Essentially, the commodities argument states that gold and oil prices increase and decrease because they both follow industry trends in real-time.

Although this argument is easy to understand, it does not reflect the stability of gold prices.

While oil prices fluctuate with commodity trends, gold tends to hold its value. Rather than shifting with changes in supply and demand, gold prices alter with monetary asset value.

Thus, the commodities argument fails to explain the genuine relationship between gold and oil prices successfully.

Gold-to-Oil Price Ratio

oil barrels and gold coins in a balancer

The gold-to-oil ratio is a valuable financial tool to help analyze the price relationship between gold and oil. By using a gold-to-oil ratio, you can more accurately compare the market values of gold and oil.

When employing the ratio, divide the price of one ounce of gold bullion by the price of a single barrel of oil. If the ratio equals more than 16, it indicates that the oil price is too low or the gold price is too high.

Conversely, a ratio below 16 shows that the cost of gold is too low and the price of oil is too high.

Using this tool can help you determine which commodity to purchase and whether or not they have excessive prices.

The ratio tool is less helpful when both oil and gold prices are too high or low. The gold-to-oil ratio can provide short-term strategic advice since oil prices are more volatile.

However, it won’t offer much helpful information for predicting long-term costs.

What Actually Affects Gold Prices?

A balance of supply and demand primarily affects oil price changes, but what about gold? Although oil and gold prices often correlate, one does not necessarily drive or regulate the other.

One of the main differences between gold and oil is that gold acts more like a currency than a commodity. As a result, gold is significantly more stable than oil.

Although most people don’t buy their groceries with gold coins, many still have valuable gold materials. Gold has a long-standing reputation for holding its value over time, even through drastic economic changes.

As a result, we can better predict gold price changes.

Monetary Policy

Although gold acts more like a currency, it is still a partial commodity, which means supply and demand can impact its prices. Traditionally, three factors affect gold prices:

  1. Inflation
  2. The value of the US dollar
  3. Interest rates

Monetary policies positively affect the direction of gold price changes. When it comes to inflation, the value of the US dollar weakens. As a result, people have to pay more to buy gold.

The effects of interest rates on gold prices are less apparent. Increased interest rates make stock quotes and bond investments more appealing to investors and traders.

As a result, the demand for gold reduces, lowering the price.

In Summation: The Relationship Between Gold and Oil Prices

buy sell and hold in different directions

Although gold and oil prices have a close relationship, key differences separate the two commodities. Nevertheless, market research shows that gold and oil prices correlate about 85% of the time.

At first glance, it would seem that oil and gold have the same reactions to various economic fluctuations. Although this has some truth, since both gold and oil prices change with the US dollar value, they behave differently during a financial crisis.

Oil prices are significantly more volatile than gold prices as they change based on supply and demand. Compared to gold, there are lower reserves of oil.

In addition, the overall need for oil is changing as more people are opting for natural gas appliances and electric vehicles.

On the other hand, gold tends to hold its value during economic changes. Gold has a significantly more extensive inventory, allowing it to have a more stable price behavior.

To answer the original question, “Do oil prices determine gold prices?” the answer is no. Although gold and oil prices move in similar directions when they change, one does not necessarily determine the cost of the other.

Although many argue that there are specific reasons for the striking correlation, there is no particular reason for the parallel price relationship.

Generally, short-term factors tend to have a more significant impact on oil prices than gold, allowing gold to be less volatile.

Learn More About Gold Investments Today

It’s no secret that gold provides a worthwhile investment. With high value and low volatility, many investors turn to gold to earn a profit and protect their wealth.

One of the benefits of gold is that there is more than one way to invest in it. Gold offers promising returns with minimal risk, whether you are a new or seasoned investor.

Oxford Gold Group can help you explore your gold and silver investment options to help you achieve your financial goals.

We specialize in helping people with their gold and silver IRAs. Whether you want to know more about the relationship between gold and oil prices or want to explore silver IRAs, we are here to answer your questions and help get you started.

Start your precious metals investment journey today by calling Oxford Gold Group at 833-600-GOLD. You can also contact us using our convenient online form.

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