Oil prices have moved up around $130 per barrel based on limited supply, triggering fears of inflation.  This causes price increases in everything from petrol and diesel prices to fertiliser costs.  Any increase in fuel costs makes it more expensive to distribute goods.  This means that prices will increase.

Consequently, the DJIA fell nearly 200 points, or 1.5%.  What is the future for gold as oil prices increase?

In previous articles, I’ve highlighted the reason that oil prices and gold prices are currently tending to move together.  The correlation is not as simple as oil producers immediately putting their money from oil sales into gold however.  It is all to do with what is currently the best place to store value.

In my view, gold is seen as a safe haven at present.  At times currencies fill this role, sometimes commodities such as grains are also a store of value. Oil producers traditionally use the US dollar, but this has been under downward pressure since the war in Iraq started, so gold is perceived to be more attractive.  In addition, gold tends to hold its value when inflation is high.  These factors combine to make oil and gold move together.

Recently, gold prices have taken a hammering as it fell through some key resistance levels, but in the last week, gold has seen a resurgence.  Whilst the long term trend is still up, the 60 day chart below shows that the short term trend is likely to be downward if the price movement does not break out of the downward channel:

Similarly, I think that oil prices have probably peaked for the moment.  Again, they will increase in the long term, but we are traders, not investors.  Anyway, we shall see how it progresses.

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Tags: gold price, Gold trading, oil price

This entry was posted on Wednesday, May 21st, 2008 at 1:13 pm and is filed under Market Commentary. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.