NotQuiteRandom
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There are many interlinking factors between global asset prices but try running some regressions on Oli prices, Gold prices and the major USD crosses. Interesting statistical exercise.
Currently there are a number of sources of excess liquidity sloshing around the financial markets, that have inflated a number of asset bubbles globally.
*petro-dollars [Saudi's recycle into non-denominated US$ assets, Gold being one]
*Yen carry trade [Gold again can be a recipient due to Hedge Fund activity]
*Chinese Current Account surpluses [tend to support US$]
*US$ credit expansion
Assets supportive to Gold specifically;
*ETF's [Gold]
The obvious link twixt Oil & Gold, is as petro-dollar revenues fall, in correlation to falling Oil price, the flow of petro-dollars into other asset classes falls, Gold being simply one of these asset classes.
jog on
d998
*petro-dollars [Saudi's recycle into non-denominated US$ assets, Gold being one]
*Yen carry trade [Gold again can be a recipient due to Hedge Fund activity]
*Chinese Current Account surpluses [tend to support US$]
*US$ credit expansion
Assets supportive to Gold specifically;
*ETF's [Gold]
The obvious link twixt Oil & Gold, is as petro-dollar revenues fall, in correlation to falling Oil price, the flow of petro-dollars into other asset classes falls, Gold being simply one of these asset classes.
jog on
d998
Atilla
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ducati998 said:
On a little obscure note and basically get thinking process going. I would like to propose that there is no link between Gold & Oil.
I would like to propose that there is a link between storks and birth rates. It can be shown that there is a positive correlation between sightings of storks and increase in birth rates.
Think about it. The supply and demand curves for these two products don't even relate.
One is a metal and one is liquid. They are not complimentary or substitutes.
Link between $ and Oil yes.
Link between $ and Gold yes.
Link between Oil and Gold - No. None what so ever.
Thank you all of you for your comments.
The reason I asked this question is becuse I stumbled across something called the 'oil/gold ratio'. Apparently this could generate buy/sell signals - if you can decide on an objective basis what these levels are !
I am trying to find out what the science is behind this ratio and it seems to be not as clear as I expected.
What are your opinions/experiences as to this ratio's usefulness as a speculative tool ?
The reason I asked this question is becuse I stumbled across something called the 'oil/gold ratio'. Apparently this could generate buy/sell signals - if you can decide on an objective basis what these levels are !
I am trying to find out what the science is behind this ratio and it seems to be not as clear as I expected.
What are your opinions/experiences as to this ratio's usefulness as a speculative tool ?
Atilla
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AlexBB said:
Look at the economics.
You could draw stats for share price movements and the weather but if you don't apply common sense and economics you'll get peanuts.
They may be linked to economic activity and some speculative action but so is the price of potatoes. Would that imply potatoes and oil are linked and should you be searching for a ratio of supply and demand to determine lagged price movements.
They may be listed on a spectrum of financial assets to trade as ducati998 rightfuly suggested but in general IMO all things being what they are there is no relationship between them.
Unless you wish to expand more on what you have read and enlighten us.
Positive and negative correllations don't mean much if you don't apply common sense and sound economics.
Attila
I would disagree on the basis if you propose links between Gold & Oil with the US$, we then have the common denominator being the US$
Therefore we have in effect a *theoretical* triangular arbitrage.
Further if we posit that Gold is deflationary, and Oil is inflationary. In effect, you could cancel the common denominator [the US$] ending up with an Oil and Gold relationship.
The problem resides in the fact that the link is now only theoretical, or psychological in nature.
Once Nixon broke the $/Gold convertibility in the 1970's, the legal basis for this trade evaporated....................all that remains is the moral basis.
jog on
d998
I would disagree on the basis if you propose links between Gold & Oil with the US$, we then have the common denominator being the US$
Therefore we have in effect a *theoretical* triangular arbitrage.
Further if we posit that Gold is deflationary, and Oil is inflationary. In effect, you could cancel the common denominator [the US$] ending up with an Oil and Gold relationship.
The problem resides in the fact that the link is now only theoretical, or psychological in nature.
Once Nixon broke the $/Gold convertibility in the 1970's, the legal basis for this trade evaporated....................all that remains is the moral basis.
jog on
d998
TWI
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Look at the relationship in Yen /Euro and $ and then try to make a decision. Good luck and don't forget to kiss your a*rse goodbye before you put on the position.
When ever this spread gets little wide or narrow it always appears on teh IB report otherwise i never hear it mentioned.
When ever this spread gets little wide or narrow it always appears on teh IB report otherwise i never hear it mentioned.
Atilla
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ducati998 said:
So is this relationship positive or negative? I'm still not clear on the thought process.
Unless you produce gold and oil they are both priced in $ their price will move up or down depending on your currency similtaneously.
I suspect you are implying in times of high inflation people buy gold to hedge against inflation and so taking disposable income out of circulation. But there is a flaw in this arguement.
For this to be the case real interest rates have to be negative to cause people to switch to gold otherwise deposit accounts pay more interest with no risk. In this scenario people use gold as just another currency or value saving deposit system. A little less liquid than cash.
My point is one is digging very deep to look for connections which aren't there.
My screens today show both gold and oil rising. But I would put that down to a little good economic activity and some war talk to unsettle the markets and a great deal of uncertainty.
Maybe somebody can chart the movement of Gold and Oil over few years for us to observe and discuss. I can't do it with my limited trading system.
Atilla
When the world adhered to the Gold Standard, the following was true;
Increased Gold = Cheaper money
Decreased Gold = Expensive money
Oil
Increased money spent on oil = less money = more expensive money
Decreased money spent on oil = more money = cheaper money
Gold is no longer the backing for currencies, as the world has gone fiat, which carries an inflationary bias which makes the following equation *theoretical* and why sometimes it holds true, and sometimes it fails. In addition to the common denominator of money, we have the common denominator of the *fear factor* or as you have pointed out war. War today revolves around commonly, energy and oil. Therefore the three equations that describe the inter-relationships are;
*Increased cost of oil = less money = expensive money = falling price of gold
*Falling cost of oil = more money = cheaper money = rising price of gold.
*Intangible [War] = high cost of oil = less money = expensive money = high gold price
So today, we have;
War + Oil [up] + Gold [up]
This is the confusion of the relationship breaking down due to the fear factor.
If there was no fear factor, the standard equation would hold relatively true.
jog on
d998
When the world adhered to the Gold Standard, the following was true;
Increased Gold = Cheaper money
Decreased Gold = Expensive money
Oil
Increased money spent on oil = less money = more expensive money
Decreased money spent on oil = more money = cheaper money
Gold is no longer the backing for currencies, as the world has gone fiat, which carries an inflationary bias which makes the following equation *theoretical* and why sometimes it holds true, and sometimes it fails. In addition to the common denominator of money, we have the common denominator of the *fear factor* or as you have pointed out war. War today revolves around commonly, energy and oil. Therefore the three equations that describe the inter-relationships are;
*Increased cost of oil = less money = expensive money = falling price of gold
*Falling cost of oil = more money = cheaper money = rising price of gold.
*Intangible [War] = high cost of oil = less money = expensive money = high gold price
So today, we have;
War + Oil [up] + Gold [up]
This is the confusion of the relationship breaking down due to the fear factor.
If there was no fear factor, the standard equation would hold relatively true.
jog on
d998
Atilla
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ducati998 said:
For the benefit of other readers, I'll just say this.
Yes president Nixon took the US out of the Gold Standard back in 1973 I think, because the Vietnam war saw it's gold reserve diminish to peanut levels. Just as oncoming wars will damage the $. Hence the current switch from $ to gold.
The explanation explains in a long worded way disposable income and taking money out of circulation. And that's it. Even then it brakes down when uncertainty (eg 1 example war) creeps in - which is inherent in any market place between buyers and sellers.
However, considering, wealth effects, interest rates, inflation, economic growth, other spectrum of assets (including vintage wine) to spend / invest ones money on, the explanation or relationship is a very simple one. I would recommend one looks for direct relationships that are far more stronger than obscure convulleted ones. Anybody who wishes to base their trades or signals on such observations hey that's kewl go right ahead...
I'm just going out for a little jog and some fresh air now...
Atilla
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Whilst doing some research on Gold came accross this interesting article about the relationship between Gold & Oil and our discussions on this site...
Quote from the article
"More importantly for active gold traders, short-term fluctuations in the gold price have next-to-nothing to do with movements in oil. From 1983 to 2006, the average correlation between their weekly price changes was a mere 0.10.
Yes, the connexion improves if you look at the three years ending Dec. '06. It rises to 0.33.
But the correlation would be nearer to 1.00 if gold really was "all about oil".
"Gold's bull market is all about oil"
I really feel this article hits the nail on the head. Especially the question posed to the Fed.
My summary as in the article is that oil and gold are not connected. I'm not sure about the articles assertion that there is no correllation between other base metals and gold but I can see gold is unique in every aspect of the word.
The problem or significance of oil is that it will will be reflected in inflation which will impact interest rates which will impact shares and return on investments along the various spectrum of assets and eventually on gold to rise if $ falls or inflation rises or gold to fall if fed raises interest rates (Not mentioning geopolitical uncertainties).
Quote from the article
"More importantly for active gold traders, short-term fluctuations in the gold price have next-to-nothing to do with movements in oil. From 1983 to 2006, the average correlation between their weekly price changes was a mere 0.10.
Yes, the connexion improves if you look at the three years ending Dec. '06. It rises to 0.33.
But the correlation would be nearer to 1.00 if gold really was "all about oil".
"Gold's bull market is all about oil"
I really feel this article hits the nail on the head. Especially the question posed to the Fed.
My summary as in the article is that oil and gold are not connected. I'm not sure about the articles assertion that there is no correllation between other base metals and gold but I can see gold is unique in every aspect of the word.
The problem or significance of oil is that it will will be reflected in inflation which will impact interest rates which will impact shares and return on investments along the various spectrum of assets and eventually on gold to rise if $ falls or inflation rises or gold to fall if fed raises interest rates (Not mentioning geopolitical uncertainties).
i might add my own thoughts to this one...
As oil prices increase, they have a slight effect on inflation. A Bank of England report said that a $3-$4 increase in oil caused a 0.1% increase in inflation over the course of 2 years. Now this increase is quite minimal, but different economies will react differently to changes in the oil price, depending on their consumption and how it is effects the supply chain of goods. Historically gold has retained value in the face of inflation, in 1910 gold was $20 an ounce, and in late 1990's the inflation adjusted price for 1oz of gold should have been $380, and in fact it was $370. However, we need to understand why gold has had this characteristic.
Gold as we all know is a dollar denominated asset, and being a precious metal it has an intrinsic value. Now if for someone reason, the $ is falling in value and the gold price remained unchanged, then an abritrage opportunity would exist by shorting dollars and purchasing gold. Therefore, gold must move to retain its intrinsic value.
I am not very learned on the effect of Oil on the $, but I do agree with Atilla, in that the link between oil and gold is the value of the $, and not a direct effect.
But with all this hedging and speculative trading activity it is very difficult to ascertain what actually drives the Gold market.
As oil prices increase, they have a slight effect on inflation. A Bank of England report said that a $3-$4 increase in oil caused a 0.1% increase in inflation over the course of 2 years. Now this increase is quite minimal, but different economies will react differently to changes in the oil price, depending on their consumption and how it is effects the supply chain of goods. Historically gold has retained value in the face of inflation, in 1910 gold was $20 an ounce, and in late 1990's the inflation adjusted price for 1oz of gold should have been $380, and in fact it was $370. However, we need to understand why gold has had this characteristic.
Gold as we all know is a dollar denominated asset, and being a precious metal it has an intrinsic value. Now if for someone reason, the $ is falling in value and the gold price remained unchanged, then an abritrage opportunity would exist by shorting dollars and purchasing gold. Therefore, gold must move to retain its intrinsic value.
I am not very learned on the effect of Oil on the $, but I do agree with Atilla, in that the link between oil and gold is the value of the $, and not a direct effect.
But with all this hedging and speculative trading activity it is very difficult to ascertain what actually drives the Gold market.
rathcoole_exile
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UncleNed;344316 it is very difficult to ascertain what actually drives the Gold market.[/QUOTE said:it's pretty, it's shiny and my wife wants more of it
look at the through flow of the raw commodity itself thru Dubai - 1 Billion Indians can't be wrong ...
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