How Crude Oil Impacts Gold, Interest Rates and The Value of the Dollar

Gold prices have always had a correlative effect on the value of the US dollar and investors have always been clued in to how it has a role as both commodity and a currency. But oil has a symbiotic effect with the price of gold too and investors can use this relationship to analyse long-term effects of interest rates and inflation.

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It is well known that the US dollar is the benchmark pricing mechanism for gold. When interest rates rise, investors move their assets into bonds and stocks, but when interest rates decline, those assets are then converted back into solid commodities like gold. For this reason, gold tends to be on the opposite side of the balancing scales in US dollar fluctuations.

When the the value of the US dollar increases, gold becomes expensive for other nations to purchase and demand falls. Similarly, with a weaker dollar, investors look to gold as a safer alternative.

Crude oil production not a concern

Crude oil has been the subject of intense speculation in recent years, with many observers seeing a drop in the world's oil production capabilities, but which isn’t borne out by actual known oil reserves. Supply of oil and the availability of oil and gas resources isn’t yet a concern and increases in oil and shale oil deposits, and the efficiency with which it can be extracted, has meant the US has actually become essentially energy independent.

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Energy prices are such a big key to inflation and interest rates and the near deflationary economy in Malaysia at the beginning of 2019 has been influenced by the fall in fuel prices. As such it has a big part to say in the price of gold, which, in turn, is indelibly linked to the value of the dollar and interest rates.

The inflationary relationship between gold and oil

Both gold and oil are considered commodities which can be standardized and interchangeable, as both have global importance. Crude oil, the primary source of energy cost for gold production has an integral influence on the manufacture of all products.

The correlation of both commodities can clearly be seen when looking at the long-term price of oil and gold. There were the price peaks in 2008, before both took a small dip after the financial crisis. In 2011, both prices spiked at the same time when oil’s price topped out at over $180 a barrel and gold at nearly $1200 an ounce. This tandem movement was followed with a gradual fall in both prices through 2015.

Shorter term price comparisons reveal that gold and oil usually rise and fall at similar levels at similar times. Rising oil prices push up demand for gold as kind of hedge furthering the correlation in price.

In a modern economy, oil is often more important than gold. Nearly everything depends on oil, and it directly impacts government and financial markets arguably in a bigger way than gold does. When oil prices rise, it increases inflation, which, in turn, affects interest rates, the value of the dollar and the value of gold.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes.