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    Symmetry between prices of gold and crude oil coming apart

    Synopsis

    Investors are buying crude oil as gradual economic recovery globally is expected to boost energy consumption.

    Investors are buying crude oil as gradual economic recovery globally is expected to boost energy consumption.

    Commodity Summary

    MCX
    A five-year symmetry between international prices of gold and crude oil is coming apart with investors drifting away from the yellow metal as their risk aversion diminishes. Historically, both these commodities had positive correlation, with their prices moving in tandem in either direction. However, the 120-day correlation between crude oil and gold turned negative for the first time in five years since March.

    The average correlation in the past seven years between spot gold and the West Texas Intermediate (WTI), one of the major benchmarks for crude oil, has been a positive 0.34, but this relation is drifting towards the negative zone, as investors start to regain their confidence and move away from gold, which is considered a safe haven. At the same time, they are buying crude oil as gradual economic recovery globally is expected to boost energy consumption.

    “Crude oil and gold prices are coming apart as investors perceive that the world is not likely to go in doldrums in the near future,” said the global head of commodity and structured trade finance at an MNC brokerage. “The investment in gold increases with increased risk perception in the market as it is considered a safe heaven. But, with risk easing across the asset class gold is losing momentum and crude oil is perking up with pick up in GDP growth globally,” he added.

    The correlation measure shows how two variables are related and it ranges from plus one to minus one. If the measure is plus one, it means both variables move in perfect symmetry while minus one shows a complete lack of symmetry. The correlation between crude and gold peaked at 0.62 in July 2010.

    Crude and gold have moved together for the past five year as investors sought to diversify into commodities from equities and bonds. But now, globally, investors are buying crude oil and selling gold. Gold holding of exchange-traded funds has reached 1,714 metric tonnes, its lowest since July 2009. Meanwhile, the International Energy Agency (IEA) raised forecasts for global oil demand in 2014 by 65,000 barrels a day, following strongerthan-expected growth in the first quarter in developed countries.
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    3 Comments on this Story

    Name2281 days ago
    the prophecy of uptrend in demand for the year 2014 alone is enough to compare with the years lying ahead of 2014???? guess would be a scURRY approach....
    Treasure Seeker2282 days ago
    "crude oil is perking up with pick up in GDP growth globally," he added." Two things
    here. 1.Has this guy been asleep for the past couple of weeks while gold has moved up? 2.The U.S. GDP was a whopping -2.5 with the revised numbers.
    Trk N2282 days ago
    This may be because Iraq cannot influence global gold prices.
    The Economic Times