Interrelationship between

dollar, gold, oil and real estate

HISTORY BEHIND LINKAGE OF GOLD, DOLLAR AND OIL

TIMELINE NAVIGATION1848

1861

1913

1930s

1944

1965

1971

1974

Inception of gold standard

Issuance of us currency

Creation of federal reserve

Gold standard made the great depression worse

The Bretton wood agreement

Devaluation of dollar

Demise of gold standard (Nixon shock)

Petrodollar economy

Correlation between US$ and gold

As the chart shows, there’s an inverse relationship between the trade-weighted U.S. dollar and the price of gold. Trade-weighted value shows how the U.S. dollar is gaining or losing purchasing power—compared to its trading partners. However, this inverse relationship isn’t as precise as it used to be under the gold standard. Even though the gold standard is gone, there’s still a psychological tilt towards gold whenever the value of the U.S. dollar decreases. 

REASONS BEHIND INVERSE RELATIONSHIP

Preservation of Wealth Because of gold’s consistent value around the world, many investors see precious metals as a way to preserve wealth despite social-economic turmoil that could flatten fiat currencies.

Portfolio diversificationYour ability to invest in something other that fiat currencies, stocks, and bonds can help you save if market trembles. One of the key principles of investing is diversification. With a precious metals portfolio you can ensure that all your investments won’t be lost because of negative market volatility.

Gold-to-silver ratioWhen trading commodities, sometimes it’s easier to make investments that can increase your profits. Using the gold-to-silver is a perfect example of how commodity trading can increase your wealth

Hedging against inflationInvestors typically buy large quantities of gold when their country is experiencing high levels of inflation. The demand for gold increases during inflationary times due to its inherent value and limited supply. As it cannot be diluted, gold is able to retain value much better than other forms of currency.

Correlation between US dollar and crude oil

USA is the largest importer of crude oil. The country suffers a huge capital flight as a large sum of us dollars flows out of the country straight towards OPEC countries. Besides USA holds major investment in oil drilling activities and holds largest oil reservoir in the world.As shown in chart there exists negative correlation between US dollar and oil prices.There are many factors that have impact on oil pricing such as global demand, OPEC cartel, taxes, environment policies, geopolitical conflicts, logistics and infrastructure, changing supply landscape but lets analyze it on account of currency fluctuations.

Reason behind negative relationship

Pegged dollar relationAs oil are dollar denominated commodities, devaluation of dollar leads to limited supply of oil because OPEC doesn’t want to undertake risk and loss associated with weaker currenies rather diverts towards safe heaven such as gold, other currencies etc.

OPECS pricing The pricing strategy for crude oil by OPEC members shows demand and supply relationship of oil over dollar.

Oil price commodity

Inflation value of dollar

Correlation between crude oil and gold

Oil influences goldRaising oil prices is not favorable to economy, dampening growth and dropping stock prices so investors look for alternative assets such as gold. Thus oil price indirectly affects the price of gold.

Oil affects gold minesGold mining tools, equipment and machineries require large volume of oil as energy fuel so expensive oil makes gold extraction more expensive and therefore minimize the profit margin of gold.