Precious Metals and Oil have a History

Precious metals, especially gold, have long been known for their incredible value and powerful purchasing power all over the globe. They are considered the standard of value for any currency that is used anywhere in the world. They are often referred to as crisis commodity as people flock into them especially in times of economic and geopolitical turmoil as they serve as inflationary and deflationary protection.

Over the years, studies between the correlation of precious metals and other commodities such as oil have been a hot topic, which has been further ignited with recent global developments. Currently, the financial markets have become extremely complicated as new financial market strategies were introduced. This complexity lead to the correlation between prices of oil and precious metals. The price of oil keeps climbing higher due to the "artificial scarcity" of oil supply created by the Organization of Petroleum Exporting Countries (OPEC) and Russia despite the fact that the U.S. oil producers are exporting record levels of oil. What then is the relationship of the price of oil and precious metals? How does the price of oil influence precious metals?

First and foremost, oil and precious metals are both commodities that are greatly affected by inflation, dependent on the economic standing and the value of U.S. dollar. Moreover, the price of oil is somewhat accountable with inflation and the demand and prices of precious metals. On the other hand, it is affected by inflation which means that an increase in the price of oil signifies an increase in the prices of precious metals. In easier terms, these two have an inflationary relationship. A rise in the price of oil can lead to a rise in inflation. This is where precious metals enter the scenario, as they serve as a good hedge against inflation. Relatively, the prices of precious metals increase as inflation begin to rise, thus the prices of precious metals and oil have a direct relationship.

Politically and economically speaking, precious metals have played a very crucial role in the stock market. Precious metals, altogether with oil products are known as the two most important indicators in international markets - their prices as well as the demand for them significantly affects the economy and indicates whether the economy is healthy or not. Precious metals are known as the "run-to" assets of investors when inflation is gradually increasing and an economic and political instability is expected. An increase in the prices of oil even pressures inflation which causes precious metals to inflate as well. Hence, when then prices of oil fluctuate, a movement in precious metal prices is expected too.

The correlation between the two is strong.

Another Factor

Precious metals will always be a valuable commodity come what may. They will always be the so-called safety sources amid inflation or deflation. Oil and precious metals boost each other and their relationship is expected to remain strong in the coming years. One connection between them is the actual process of mining precious metals. Oil is used in almost every step of the way in the search of precious metals, from mining to refining, thus when the prices of oil increase, the production costs of precious metals follow which leads to an increase in the prices of the end products. A sharp rise or fall of oil prices is accompanied by a tremendous change in the prices of precious metals. Taking it further, both precious metals and oil are inversely related to the U.S. dollar which means that an increase in the prices of these commodities indicate a decrease in the value of the U.S. dollar.

Precious metals will always be a valuable commodity come what may. They will always be the so-called safety sources amid inflation or deflation. Oil and precious metals boost each other and their relationship is expected to remain strong in the coming years.