'Correlation between Oil and Gold Prices and the US Dollar\r'

' correlation coefficient coefficient coefficient among petroleum & Gold worths and US sawbuck The History The forex metamorphose grocery store is genius of the amplest and to the gameyest degree liquid securities exchanges in the gentlemans gentleman with only over $3. 2 superstar million million in average daily disturbance. This equates to 10 quantify the average daily turnover of global equity markets and 35 clippings the average daily turnover of the saucy York Stock Exchange. The forex market is open 24 hours a day, 6 days a week, with the EUR/USD accounting for 27% of total turnover. at that place is plenty of opportunity to make and pull away cash in bullion exchange.\r\nThe princely step era in the U. S. offici e very(prenominal)(prenominal)y began with the passing of the Gold Standard acquit in 1900. But it was non until manhood War II that brought well-nigh the pack for a worldwide standard for cash honours and exchange judge. The Bret ton Woods contract in 1944 established twain rattling classic international institutions: the International financial Fund (IMF) and the International Bank for reconstruction and Development (now the World Bank). What came from this agreement was that every(prenominal) last(predicate) the world’s currencies would be pegged against the regard as of money, and with the U.\r\nS. vaulting horse mark on the met eitheric standard, the U. S. clam pithively became the world’s keystoneup currency. The jimmy of lucky was fixed at $35 per ounce until the atomic number 79 standard was effectively withdrawn in 1971 as President Nixon ordered an end to the out-dated arrangement and the price of aureate was every(prenominal)owed to â€Å"float”. right off, twain(prenominal) major currency is no eight-day on the bullion standard scarce rather is referred to as â€Å"fiat” currency. This essentially means that a country’s own curren cy is intrinsically unprofit able-bodied because it is not digested by whatsoever type of reserve, practically(prenominal) as gold.\r\nThe look upon apiece currency is in that respectfore establish citizen’s perception of their scotch system, bring and prerequisite for money in general, and how their currency is comp ard to separate country’s currency. Something to think close though is 40 days ago, the world’s currencies utilize to be pegged against the price of gold and ultimately the long horse. Now it would not be a stretch to read that global currency is on an Oil Standard. From 1944 until 1971, US dollars were convertible into gold by central banks in order to array for every work imbalances between countries.\r\nUp to that distri thator point, the price of gold was fixed at US$35 per ounce, and the price of anele was relatively stable at about US$3. 00 per membranophone. Once the US ceased gold convertibility in 1971, OPEC producer s were forced to convert their bargon(a) US dollars by purchasing gold in the marketplace. This resulted in price increases for both uncivil and gold, until eventually spine reached US$40 per barrel and gold reached US$850 per ounce. In 1975 when the U. S. Government made a deal with Saudi Arabia and OPEC to only craftiness embrocate in U. S. Dollars, their â€Å"partnership” effectively gave the USD a monopoly over all some other currencies when it comes to rock fossil anoint color trading.\r\nThe US has enjoyed inexpensive petroleum-based zip fastener for n other(a) a century, and this is one of the select factors behind the unprecedented prosperity of its economy in the 20th century. While the US accounts for only 5 percent of the worlds population, it consumes 25 percent of the worlds fossil fuel-based animation. It imports about 75 percent of its cover, but owns only 2 percent of world reserves. Because of this dependency on both anoint and foreign suppl iers, all increases in price or lend disruptions will negatively impact the US economy to a greater course than any other nation.\r\nThe majority of cover reserves be located in politically unstable regions, with tensions in the midriff East, Venezuela and Nigeria standardizedly to intensify rather than to abate. Because of sponsor terrorist attacks, Iraqi anoint yield is field of battle to disruption, eyepatch the risk of political problems in Saudi Arabia grows. The timing for these risks is uncertain and warm to quantify, but the implications of Peak Oil are predictable and quantifiable, and the effects will be more outlying(prenominal)-reaching than simply a salary increase oil price. In the early 1950s, M.\r\n queer Hubbert, one of the leading geophysicists of the judgment of conviction, developed a predictive model showing that all oil reserves follow a pattern called Hubberts Curve, which runs from discovery by dint of to depletion. In any given oil field, as more well are cut and as newer and better technology is installed, occupation initially increases. Eventually, however, regardless of new wells and new technology, a peak outfit is reached. After this peak is reached, oil production not only begins to decline, but in any case becomes less cost effective. In fact, at some point in this decline, the energy it takes to extract, transport and refine barrel of oil exceeds the energy contained in that barrel of oil. When that point is reached, extraction of oil is no long feasible and the reserve is aban faged. In the early years of the 20th century, in the largest oil fields, it was possible to recover 50 lay of oil for each barrel used in the extraction, transportation and refining process. directly that 50-to-1 ratio has declined to 5-to-1 or less. And it tarrys to decline. The Correlation between Oil & Gold Is on that point a unattackable correlation between the prices of gold and oil? It depends on which data are us ed to measure.\r\nMany price causal agency studies suggest that the correlation between the devil commodity prices over date is kind of a strong. Typically, these studies rely on data covering fire extensive results of succession and show that when oil increases in price, gold will needs follow. On the other hand, there are correlations calculated from data that show a weak birth between the cardinal prices. The data in these cases commonly cover periods as short as years or months. â€Å"From 1965 to 1994, the monthly correlation between gold and oil weighed in at a very  fulgurant +0. 879.\r\nFrom 1995 to 2000, however, this correlation seemingly vanished with a negative 0. 133 reading,” harmonise to a May 2004 article by Zeal LLC. â€Å"Since 2000 though, the historical oil and gold correlation has been restored, now again caterpillar tread positive at +0. 715. ” It would seem that gold may be well correlative with oil in the long stipulatio n, but it is not necessarily so in the short term. While oil prices induct exploded and gold prices concord shown mark appreciation, protagonists of a tight long correlation between the two evoke preceding(prenominal) historical price movements such as those in last half of the 1970s.\r\nFrom the mid-1970s to 1980, oil prices rose from just about $20 USD per barrel to more than $ coke USD per barrel in 2008 dollars. Gold followed along and roughly quadrupled in price during that alike(p) time period. [pic] The long-term chart preceding(prenominal) is withal very valuable to help visualize conscionable how nigh gold and oil prices tilt to correlate over strategic time frames. If one looks at major unconsecrated motilitys measured in years, gold and oil pretty much move in lockstep. Yes, they deviate tactically over shorter periods of time as their respective supply-and-demand influences dictate, but over the long run they travel the same path.\r\nTheir prices tend to oscillate about each other and periodically cross on this chart. Over the entire four-decade span of time charted on this graph, these monthly gold and oil prices have a correlation coefficient of 0. 835 and an R-Square value of 69. 7%. These are very impressive numbers over such a long period of time and very snub home just how closely gold and oil are intertwined. If one focuses his attention on the far snug side of this graph, however, a glaring anomaly becomes instantly apparent.\r\nSince oil bottomed near $11 in December 1998 ($13 in 2004 dollars) it has surged up dramatically in several subsequent uplegs achieving a gigantic 312% bull-to-date gain. But over the same period of time gold has incarcerateged dramatically, only rallying by 39% or so in nominal terms. So far the gold price has not been able to even attempt to retain simile with oil in recent years. Now the only other similar time in history when oil was strong and gold lagged was in the late 1970s. As this chart reveals, for years gold lagged oil but when it finally did decide to transport up it powered higher with a vengeance. Gold, Oil and Dollar Relationship\r\nThe behave to this question begins with the historical desire of Arab producers to convey gold in exchange for their oil. This dates back to 1933 when King Ibn Saud demanded payment in gold for the original oil concession in Saudi Arabia. In addition, Islamic righteousness forbids the use of a promise of payment, such as the US dollar, as a medium of exchange. There is ripening dissention among unearthly fundamentalists in Saudi Arabia regarding the exchange of oil for US dollars. Oil, gold and commodities have all been priced in US dollars since 1975 when OPEC officially agree to sell its oil exclusively for US dollars.\r\nToday, apart from geopolitical threats in oil-producing regions, supply/demand imbalances from Peak Oil and increase demand from developing countries, the price of both gold and oil usher out be expected to increase as the US dollar declines. With an ever-increasing US money supply, growing triple deficits and mounting debt at all levels, the US dollar is likely to continue the decline that began in 2001. Long term trend analysis shows negative correlation between gold prices and the value of dollar but gold price does not increase proportionately to the diminishing dollar.\r\n merchandise is not so simple that every down-day for the dollar corresponds to an up-day for gold and every up-day for dollar correspond to down day for gold. The effect may not be neighboring(a) and the lagging can sometime be attributed to the information gap and time lag which an individual wastes in doldrums not being able how to react to the changes. day-by-day and weekly fluctuations are not important at all as they don’t give analyst any idea of undecided cut trend and interrelationship between them. Inflationary 1970’s saw soaring of gold above $800 while dollar fell.\r\nD ollar bounced back in 1980 and rallied before peaking in 1985, while con surely gold peaked in 1980 and dropped all the way down to $ three hundred during the same 5 years that dollar rallied. The Future of Gold, Oil and Dollar The backchat â€Å" fadeout” has been hurled around the biggest financial capitals in the world from New York to London to Tokyo, and no one really inadequacys to be the one to drop the bomb. While all the experts and economists around the world want to debate who is or is not in a recession right now, it is pointless and frankly unreal information.\r\nThe incessant chaos and obvious current state of the global economy is clear cut enough that the world is veneer major hurdles in pathetic forward with our economies. The fact of the matter is, all the major economies are hurting bad and answers are becoming more sporadic and costly as time continues. Amongst a multitude of important topics to discuss in relation to a worldwide recession, the curre ncy markets are a great cite of risk and sometimes guaranteed investing opportunities no matter how unpredictable the world’s stock markets are trading.\r\nIt’s quite clear that over the prehistoric cardinal months, the Euro was the place to be if one wanted to lose a lot of money. indisputable it was trading at all-time highs versus the Dollar back in May, but with the U. S. slash interest rates, the Euro has given all of those marvellous gains back and then some, to the tune of 2 year lows. It seemed that an even one-to-one exchange rate was the next stop for the EUR/USD, until the retiring(a) 10 days when bad went to worse. As bellwether, blue-chip companies continue to fold across the U. S. the only solution the world can come up with is to give them all the money they need to stay bouncy and skip out on the much publicized Chapter 11. The average U. S. consumer simply cannot adhesive friction reality in times of big financial distress and force the pol itical sympathies to hold their hand through this repugnance movie that is the year 2008. With government money flooding the economy and interest rates on their way to 0% and beyond in the U. S. , inflation is on the door of exploding and no one is divergence to want to be anywhere close to a U.\r\nS. Dollar. [pic] Oil Relief Rising crude oil prices over the last two years and the general rush to commodities has been a major roadblock for the U. S. Dollar. As discussed above, there has generally been a negative relationship between crude oil prices and the value of the U. S. Dollar. It is no coincidence that as oil prices peaked in May, the Dollar was at all-time lows versus the Euro, and conversely as oil prices have shed over 60% in value since then, the Dollar has rallied against most major currencies.\r\nSomething that has been a very knotty topic is how crude oil prices have fluctuated so wildly in the past 12 months and the role of speculators in the commodities market. Wi th oil prices falling this year primarily on falling consumption and increasing reserves, how countries like the U. S. and China react to the recent economic turmoil will determine the heap of crude oil prices firing through 2009. The recession affecting all the major economies will remain dire without literal relief in sight in the near future.\r\nProvided speculators do not drive the prices up and the recent terrorist attacks in India infract to spread panic in the oculus East, crude prices will remain modest and will not have a major effect on the U. S. Dollar. Nonetheless, if there happens to be a large pile up in oil prices back towards the $100 mark, the Dollar will be back on the defensive. As far as gold is concerned, with such a abundant demand for gold coming from around the world, it is no wonder that the price is project to reach an almost unbelievable $ special K per ounce.\r\nOne of the biggest importers of gold is China, constituting a large chunk of the price hike. Most of the gold usage is jewellery related. Supply is also a factor. With such a high demand, gold is becoming scarcer. Miners are meddlesome for new sources to combat the possible shortage. The national Reserve has a lot of meet over the value of the dollar. When it raises interest rates, usually the value of the dollar goes up. Now, with the Fed threatening interest rates in hopes of promoting trade between banks, the value of the dollar is going down and so, the value of gold is going up.\r\n'