The following is a post by Luis Aureliano. Enjoy!
Understanding Oil and Gold
Oil, which is the most traded commodity in the world, affects the lives of almost every person on a daily basis in many different ways. The most important of these is to provide the fuel and lubrication for every mode of transport, be it land, sea or air, which you can think of. The wheels of industry are kept turning thanks to oil and the agricultural and other machinery used to grow or produce most of the other commodities we use, are almost totally dependent on oil for production to be maintained.
Gold, on the other hand, is the fourth most traded global commodity, and while its role has changed, gold also had a daily impact on our lives in days gone by. Most of the global currencies were linked to gold reserves for many years, making it a sought after commodity in that respect, while its uses in jewellery manufacture are legend. Today, many governments still maintain gold reserves, and while we also utilize gold leaf and gold foil for decorating, new uses for gold in the electronics and medical world are being discovered daily.
Oil versus Gold
Oil, once it has been used, is no longer around, while gold, in most of its uses, remains with us as an investment in some form or another, or it is present in electrodes, but it generally does not disappear with use. Oil is thus a diminishing commodity where the price and subsequent profit taking, is largely driven by supply and demand while the return on an investment in gold is derived from price fluctuations.
Because oil is a commodity that we use on a daily basis, the price of oil or fuel has a direct impact on inflation, which means that the rate of inflation follows the oil price trend. The gold price tends to move in tandem with the rate of inflation which means that when oil goes up, inflation will probably increase and the gold price will follow suit.
The inverse relationship the U.S. dollar has with all USD quoted commodities, such as gold and oil, means that the price of these two commodities is also subject to fluctuation in line with the greenback. Calculations on the respective prices on the 2nd of December 2015 showed the following:-
- Gold traded at $1067.30 an ounce at 01:08, a price increase of 0.20 or +0.02%, while the price actually decreased by $1.70 or -0.16%, taking the strengthening of the USD into account;
- Crude oil traded at $41.63 a barrel at 01:08, falling by 0.17 or -0.40%, while the price actually decreased by 0.05 or -0.13% with the USD strengthening factored in.
The percentage decline in the price for gold and oil was almost the same with the currency fluctuation factored into the equation, illustrating the inverse relationship to the USD as well as how the prices track each other.
Oil and Socio Political Events
The oil price is currently very much a victim of global socio political events, which are largely centered on the major Arab oil producing states. OPEC (Organization of the Petroleum Exporting Countries), led by Saudi Arabia, has been steadily increasing productivity rates which has the supply side of world oil markets. The realities of a slowing in economic growth in China, which is the second largest global consumer of oil and oil based products, and the subsequent slowing of the economies in most of the commodity producing states, has had a negative effect on the demand side for oil. The increased production in the face of a falloff in demand has disturbed the supply and demand equation which has resulted in the current depressed oil price.
Gold and Socio Political Events
The uncertainties of the socio political scenario have the opposite effect on gold as many investors view the precious metal as a safe haven in uncertain times. This has created some demand for the precious yellow metal, more than compensating for the drop in consumption in China, which alternates with India as the world’s largest gold consumer.
According to World Gold Council data, the demand for gold in the third quarter of 2015 increased by 8% year on year, while the production of the precious metal declined by 1% in the same quarter.
The supply and demand scenario for oil is thus almost diametrically opposite to that of gold. Despite this difference, however, the gold price has fallen by 44% since it peaked at $1916.25 an ounce in August 2011, dropping to $1061.90 an ounce in November 2015. Oil, which was quoted at $93.35 a barrel in August 2011, has fallen by 55% when it was priced at $41.68 a barrel in November.
These figures show that the gold price actually does track the oil price as is generally asserted. The only reason the gold price has not declined to the same degree as the oil price is the fact that the supply and demand ratio has not been disturbed in the same way. Gold demand has increased by 8% while supply has dropped 1% while the opposite situation with oil has seen supply up by 5.30% over the past three years while the demand has only grown by around 1% annually over the same period.
Trading Oil and Gold
In terms of which commodity to trade, you need to establish the type of trader you are as well as your trading style and risk appetite. Both commodities offer a wealth of trading opportunities and by taking into account the impact of the current socio political events around the world, you will be able to more accurately predict the direction that the price of oil and gold are likely to move in the future.
