The correlation between the dollar and gold is negative because investors enter gold when the dollar slips and vice-versa. Rising oil prices cause the U.S. trade deficit to increase, which in turn leads to depreciation of the dollar.
Historically the price of gold and oil have a positive correlation. The reason being oil purchases were paid for in gold. Even today, a sizable percentage of oil revenue ends up invested in gold.
Given that inflation is driven to a great extent by crude oil prices when oil prices rise, inflation rises as well. Gold plays the role of being a good hedge against inflation. This enhances the demand for gold and rise in its prices.
One way of identifying trading opportunities is to use the gold-oil ratio. This can be calculated using this formula:
Gold-Oil Ratio = Price of Gold (per oz.) / Price of Crude Oil (per barrel)
Most gold fans and economic historians peg the ratio between the price of gold to oil at 10:1. If the historical ratio between oil and gold is to sustain, either gold has to rise or crude has to drop.
The gold-oil ratio signals:
Buying opportunities (for gold) when the gold-oil ratio turns up at/below 10 barrels/ounce; and
Selling opportunities when the gold-oil ratio turns down at/above 20 barrels/ounce.
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