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The Gold-Oil Relationship: 3 Theories

Is there a correlation between oil and gold? The first idea suggests a direct causal gold oil relationship, the second argument proposes an impact of oil on shares of gold companies, and lastly a theory argues that the gold and oil prices are driven by a common factor.

gold and oil relationship The Gold Oil Relationship: 3 Theories

First, Oil influences gold

First, one possible argument goes that a high oil price is bad for the economy, dampening growth and dragging down share prices. As a consequence, investors look for alternative assets, such gold.  Thus, the oil price indirectly affects the price for gold. Such a scenario could be observed end of the 1970s when the oil cartel reduced the output of oil, so that its price surged. This sent shockwaves through the U.S. and global economy and resulted in the long recession of the 1970s.

Second, oil affects gold mines

Another line of thinking sees an inverse causation between the oil price and share prices of gold mining companies. Expensive oil makes gold extraction more expensive and therefore minimizes the profit margin of gold mines. This is because a big portion of mine expenses are related to energy, and the oil price.

Third, inflation impacts gold and oil

Third, both, gold and oil are traded in the U.S. dollar. Therefore, its price hinges on the strength of this currency. What is a sign of the strength (or weakness) of a currency? – It’s inflation rate. It can be argued that the prices of both commodities have a similar trend is not because one influences the other, but because their price is driven by a common factor. And this is the inflation rate.

This third theory is a reminder that correlation, meaning a similar pattern between two variables, does not necessarily imply causation. One explanation might be indeed causation: The oil price influences directly the gold rate. Another possibility is an indirect relationship, with another factor sitting in the middle. Or, as the third argument goes, a common factor that influences the rates of both commodities. It can even become more complicated, if the gold oil relationship is not stable over time. Say, in the 1970s the oil price might have had a much bigger influence on gold than it is now.

All Gold Correlation Articles

The Gold-Oil Relationship: 3 Theories
The Gold-Inflation Relationship: None
The Unstable Gold-Stock Relationship
The Gold-Dollar Correlation: A Mess Since 2009

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