Gold and Oil

Gold Balloons on Oil's Gain

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Monday, March 26th, 2007

BALTIMORE, MD — Gold for April delivery increased as much as $9.00 an ounce this afternoon after energy costs surged, spurring demand for the precious metal as a hedge against inflation.

There's always a lot of debate over the gold-oil ratio, which says that gold and oil prices will rise and fall in sympathy with one another. Both camps - those who say that gold and oil are indisputably connected and those who say the gold-oil ratio is complete bunk - make very good points. But here's the way I see it...

Rising oil prices place upward pressure on inflation.

Inflation puts downward pressure on the U.S. dollar.

And a falling dollar will almost always boost gold prices.

So while oil prices can ultimately have an effect on gold, the two are not directly related. The fact is that there are so many other aspects that go into the pricing of both commodities that it's simply foolish to assume that gold prices will always increase or decrease with oil.

As it turns out, however, today's 1% increase in gold prices can seemingly be attributed to oil, as investors ran to the yellow metal fearing higher energy prices would spark inflation. Crude for May delivery touched its highest level this year trading at $63.40 a barrel this afternoon following Iran's detention of 15 British naval personnel last week.

Gold's gains also accelerated today after the dollar fell against the euro. The greenback weakened after the U.S. Commerce Department reported that new-home sales fell 3.9% last month, increasing the likelihood of a cut in borrowing costs by the Federal Reserve. Sales of newly constructed U.S. housing unexpectedly slowed again in February to a seasonally adjusted annual rate of 848,000, the lowest level since June 2000.

Gold has run into technical resistance above $660. However, the combination of a softer dollar and rising oil prices fanning fears of inflation, coupled with the backdrop of increased geopolitical tensions in the Middle East creates a more than positive environment for gold.

On the supply side, gold warehouse stocks fell 197 troy ounces to stand at 7.58 million troy ounces and copper supplies fell 386 short tons to stand at 36,115 short tons as of late Friday, according to Nymex data.

Overall I think that we're ready for the next big leg-up in gold prices. And I urge you to start positioning yourself accordingly.

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