Breaking Down the Disparity Between Oil and Gold Prices
This analysis is by Sheena Martin, Contributing Editor, Investment U
Thursday, December 3, 2009
It’s no secret that the gold and oil markets have boomed this year.
However, while gold continues to climb, hitting a high of $1,218.40 per ounce this week, oil keeps hitting a brick wall. Over the past month, crude has traded in a range between $75 and $82 per barrel and currently sits at $77.50.
What gives?
Put simply, oil and gold prices don’t necessarily move in harmony.
The key difference is that while oil is a fuel that is used for many different products, gold is a proxy for currency. But there are two other big ones…
- Investors are looking to distance themselves from an increasingly limp dollar – and gold serves that function much better than oil.
- Oil prices are much more sensitive to the effects of supply and demand than gold.
And that explains why the yellow metal is outpacing oil by 90% over the past three months.
To a fundamental trader, oil is merely a feedstock for refineries. It churns out heating oil, jet fuel, diesel and gasoline. And right now, traders know that supply and demand don’t support $80 per barrel oil.
On Wednesday morning, for example, the U.S. Department of Energy announced that crude inventories jumped by 1.4 million barrels last week. Plus, storage is filled to the max. And despite the winter heating season, it hasn’t dented inventories yet.
On the flip side, fundamentals don’t bog down gold prices as much. The fact that gold is used as a hedge against a weak dollar (and other unfavorable geopolitical events) makes supply/demand dynamics less significant.
Plus, whenever news like Dubai’s recent debt default hits, people get anxious. And when that happens, they flock to gold, not oil.
So given the current catalysts within each market, don’t be surprised if gold continues to outshine oil. But take notice… the pendulum will always swing back.
Sheena Martin
View original at: Investment U
- (GG) Why Gold Prices Could Fall From Here – And Two Ways to Play the Moveby Karim Rahemtulla, Options Expert Tuesday, November 24, 2009: Issue #1144 Of all the great...
- (ABX) Barrick Gold Raises Debt With NotesThe world’s largest gold producer, Barrick Gold Corp. (ABX) and its wholly owned subsidiary, Barrick...
- (ABX) Barrick Gold Corporation to Acquire Chilean MineBarrick Gold Corporation (ABX), the largest gold mining company in the world, has entered into...
- (GLD) Gold’s Two-Faced DisappointmentWith the price of gold again pulling back from its 18-month highs this morning, we...
- (ABX) Barrick Gold to Remove HedgesOn September 8th, the world’s largest gold producer, Barrick Gold Corporation (ABX), announced its plans...
- (GLD) Gold Prices Creep Over $900It’s been no secret that gold prices have been creeping up lately. At just over...
Search Posts by Tag: economy | inflation | Featured
RSS Feeds by Tag:
economy | inflation | Featured |
Other Posts by: InvestmentU | RSS Feed for this author
