Gold and Crude Oil Price Tango Ends?
Historically, gold and crude prices moved in tandem. The value of the US dollar and geopolitics always played a key role in the price action of both commodities. Notwithstanding differences in their utility and unit of measurement or trade (gold quoted in dollars per ounce and crude oil in dollars per barrel), there was certain proportionality in their prices and movements.
Interestingly, from August 2005 to August 2006, while crude stagnated in the range of $55-78 a barrel, gold spurted above $700/oz. The latest is that crude prices are at a historic high of close to $140 a barrel; but gold is unable to surge well above $900/oz. Gold has clearly lagged behind the price rallies in energy market.
While some explanations would emerge in course of time, it is becoming increasingly clear that in the ultimate analysis, the utility of the commodity and the potential of the supply to respond to prices would become key issues. Demand for gold is both income elastic and price elastic. It is the admitted position that the recent run of high and volatile prices has actually resulted in demand compression or slowdown in demand growth.
As far as utility is concerned, undoubtedly, gold is an unproductive asset. The utility of gold is rather limited. The world can survive without the yellow metal. Crude, however, is different. Energy is a critical input to fuel economic growth. Given the current station of world development and status of manufacturing and transportation technologies, growth prospects would be seriously hampered without energy.
It is likely this reality is beginning to catch up with market participants. Additionally, unlike gold, in case of crude, the supply response to high prices is expected to be rather limited. The world’s mineral oil resources are finite; and demand continues to outstrip supplies.
The scenario is unlikely to change in the foreseeable future. However, there is one thing that defies explanation. Everyone is talking about extraordinary speculation in the crude market. But a look at the Commitment of Traders report issued by the regulatory authority Commodity Futures Market Commission is revealing. There is a huge speculative interest in gold, as usual.
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