Relationship Between Gold and Oil Prices: Why There’s a Big Disconnection in 2020

The relationship between gold and oil prices have turned upside down. They’ve gone in opposite directions. Should you buy gold stocks now?

Gold bullion on a chart

Image source: Getty Images.

There’s an interesting relationship between gold and oil prices. According to Market Realist, which provides institutional-quality market research, more than 60% of the time, gold and crude oil have a direct relationship.

This means that when gold prices rise, crude oil prices also tend to rise, and vice versa.

Right now, there’s a big disconnect between gold and oil prices. The gold price in U.S. dollars has appreciated 35% in the last 12 months against the WTI oil price falling by half.

Gold Price in US Dollars Chart

Gold Price in U.S. Dollars data by YCharts. Long-term normalized price changes in gold and WTI oil.

To better understand why there’s massive decoupling between gold and oil prices, let’s first talk about the gold standard.

The gold standard

In human history, there were different forms of payments. One of them was using precious metals like gold and silver as a currency. However, it got to a point where it was too much of a hassle to carry metals around. So, paper money was eventually introduced for convenience.

Under a gold standard, paper money was worth a certain amount of gold, and it was backed by a country’s gold reserves. Governments on these standards could not freely print money, because the money must be backed by the equivalent value in gold.

Britain, Canada, France, Germany, and the United States were examples of nations that used a gold standard sometime in their history.

No country uses a gold standard right now. Instead, we use fiat currency, which is more convenient but is not backed by a physical commodity (like gold) that has intrinsic value.

Why the gold price keeps rising

There have been unprecedented levels of money printing around the globe for reasons, such as economic stimulation. Moreover, inflation reduces our purchasing power over time. Therefore, $1 today is worth much less than, say, 20 years ago.

According to the Bank of Canada, the inflation rate (or decline in the value of money) has been 1.83% since 2000. So, a basket of goods and services that costs $100 in 2000 now costs $143.60, or 43.6% more.

The gold price tends to increase over time with inflation. However, the price of gold tends to rise more when there’s high uncertainty in the economy.

The COVID-19 pandemic has infected more than 5.6 million people across 188 countries. And as businesses reopen progressively, there will be subsequent waves of the virus.

The upward trend in the gold price is still intact. Since money printing continues, we’re not out of the woods with COVID-19, and high debt levels are weighing on the economies, the trend is likely to continue for some time.

What to invest in if you’re bullish on gold

If you agree gold prices will head higher or you simply want gold exposure as a hedge in your diversified portfolio, consider buying some Newmont or Franco-Nevada shares. The stocks just dipped about 15% and 9%, respectively, from their highs. So, it’s a good time to nibble.

Newmont expects to produce about six million ounces of gold this year with all-in sustaining costs of US$1,015 per ounce versus the gold price of US$1,755 per ounce. Management expects Q2 to be the lowest production and highest cost quarter of 2020, as the sites ramp up from care and maintenance. So, there could be another dip in the stock come August.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng owns shares of Newmont.

More on Metals and Mining Stocks

Gold bars
Stocks for Beginners

TSX Materials in March 2024: The Best Stock to Buy Right Now

Materials have been quite volatile, though the price of gold has surged to all-time highs. That makes this stock a…

Read more »

Gold bars
Metals and Mining Stocks

Will Gold Stocks Rally in 2024?

Down almost 30% from all-time highs, Franco-Nevada is a gold mining stock trading at a discount to consensus price target…

Read more »

A miner down a mine shaft
Stocks for Beginners

Canadian Mining Stocks: Buy, Sell or Hold?

Canadian mining stocks have seemed like such a strong investment, but with shares down significantly this year, what should we…

Read more »

Gold king in chess game face with the another silver team on black background (Concept for company strategy, business victory or decision)
Stocks for Beginners

Great News for Gold Stock Investors!

Gold has hit an all-time high! Which is good news for some gold stocks, and really good news for others.

Read more »

Gold bullion on a chart
Metals and Mining Stocks

If Gold Prices Continue to Climb, These 3 Stocks Could Skyrocket

Market certainty and geopolitical tensions typically enhance the demand for gold, and this rise is reflected in a wide range…

Read more »

gold stocks gold mining
Metals and Mining Stocks

Why Agnico-Eagle Stock Rose 5% on Monday

Agnico-Eagle stock is up 15% in the last year as inflation fears and elevated geopolitical risk are sending gold prices…

Read more »

gold stocks gold mining
Metals and Mining Stocks

Add Some Bling to Your TFSA With This Gold Mining Stock

Agnico Eagle Mines (TSX:AEM) stock looks too cheap to ignore as gold looks to make its next move.

Read more »

four people hold happy emoji masks
Metals and Mining Stocks

Got $200? 2 Lithium Stocks to Buy and Hold Forever

Lithium stocks may not be in the headlines like chip stocks, but they have just as much growth potential over…

Read more »