Oil and gold prices - historical relationship and recent behavior

Abstract

This study tries to delve into the historical relationship shared by probably the two most important commodities in the global economy, oil and gold. It has been suggested that there exists a direct correlation between oil and gold prices (both quoted in USD), with gold (per ounce) trading at a multiple band of oil (per barrel). The study starts by doing a literature survey. The historical prices of oil and gold are studied, along with the study of important aspects such as the role of the gold standard, the nature of the two commodities and current supply-demand characteristics. The next part of the study historical data collection (which is listed in Appendices I & II) of annual and monthly prices of oil and gold along with inflation. Upon statistical analysis, the nested regression model on gold and oil prices proves that the correlation between gold and oil prices is statistically significant. It is also observed that the sensitivity of gold prices to oil has reduced over the past 5-6 years with gold now being less sensitive to the price of oil. It is found that the reason for this lies in inflation. Gold and oil prices were linked to each other through inflation. Increase in oil prices fuelled inflation and since gold is a natural hedge against inflation gold prices rose too. However, in the last few years the run up in oil prices has failed to fuel inflation to the same extent as it used to do in past. Having come to this conclusion, the study now tries to investigate the reasons for the breakage of the link between oil and inflation. This is explained by looking at the reducing dependence of global GDP on oil and diversification of energy sources. Also, the role played by China in containing the inflation as well as the role played by the USD. The next question that the study looks at is the probable reason for the current run-up in oil prices, even though the world has reduced its relative dependence on oil over the last few decades.