The Gold Oil

Relationship
3 Theories

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GOLD OIL RELATIONSHIP

Is there a correlation between oil and

gold?
Three arguments:
1. First, a direct causal relationship
2. Second, impact of oil on shares of gold
companies
3. Third, gold and oil prices are driven by
a common factor

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GOLD OIL RELATIONSHIP

First, a direct causal relationship

1. One possible argument goes that a high
oil price is bad for the economy,
dampening growth and dragging down
share prices
2. As a consequence, investors look for
alternative assets, such gold
3. Thus, the oil price indirectly affects the
price for gold

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GOLD OIL RELATIONSHIP

1. Such a scenario could be observed end

of the 1970s when the oil cartel reduced
the output of oil, so that its price surged
2. This sent shockwaves through the U.S.
and global economy and resulted in the
long recession of the 1970s

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GOLD OIL RELATIONSHIP

Second, impact of oil on shares of gold

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

Third, gold and oil prices are driven by a

common factor
1. Both, gold and oil are traded in the U.S.
dollar. Therefore, its price hinges on the
strength of this currency
2. What is a sign of the strength (or
weakness) of a currency?
3. It’s inflation rate

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GOLD OIL RELATIONSHIP

1. 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
2. And this is the inflation rate

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GOLD OIL RELATIONSHIP

1. This third theory is a reminder that

correlation, meaning a similar pattern,
does not necessarily imply causation
2. One explanation might be indeed
causation: The oil price influences
directly the gold rate
3. Another possibility is an indirect
relationship, with another factor sitting
in the middle

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GOLD OIL RELATIONSHIP

1. Or, as the third argument goes, a

common factor that influences the rates
of both commodities
2. It can even become more complicated, if
the relationship is not stable over time
3. Say, in the 1970s the oil price might
have had a much bigger influence on
gold than it is now

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