Relationship Between Oil, Currency and Gold
Relationship between Oil, Gold and Currency
1
Overview
• • • • Reasons to undertake study Why do commodities affect currency? Relation of gold to oil Oil and Currency - Oil and Canadian Dollar - Oil and Japanese Yen • Gold and Currency - Gold and Australian Dollar
2
Reasons to undertake study
Forex traders can • Gauge Risk • Forecast Price Changes • Understand Exposure
3
Why do commodities affect currency?
• Economic growth and exports are directly related to a country's domestic industry • Correlation between commodity prices and currency • Tightest correlated currencies • Weakest correlated currencies
4
Relation of gold to oil
• From 1944 to 1971, US dollars were convertible into gold • Prices of gold and oil were fixed • After US ceased gold convertibility, OPEC producers were forced to convert excess dollars by purchasing gold • This increased prices for both gold and oil • Over past 50 years, gold and oil have exhibited positive correlation
5
Reasons for increasing oil prices
• Production initially increases as more wells are drilled in oil fields • After peak output is reached, oil production decline and becomes less cost effective • Earlier ratio was 50 to 1 and now it has reached 5 to 1 • With increasing demand, depleting oil reserves, oil prices are expected to rise
6
Contd…
• Increasing demand from emerging nations like India, Brazil, China resulting in demandsupply mismatch • Major oil reserves lie in politically unstable regions like Middle East, Venezuela and Nigeria
7
Oil and Currency
• Strong relationship between the global economy and the price of oil • Increase in oil prices - Gain in currency value for the countries with abundance of oil - Decrease in currency value for the countries depending heavily on import of oil
8
Oil and Canadian dollar
• Strong correlation • Canada is the seventh-largest producer of crude oil • Huge demand from US and China • Canadian dollar extremely vulnerable to
1
Overview
• • • • Reasons to undertake study Why do commodities affect currency? Relation of gold to oil Oil and Currency - Oil and Canadian Dollar - Oil and Japanese Yen • Gold and Currency - Gold and Australian Dollar
2
Reasons to undertake study
Forex traders can • Gauge Risk • Forecast Price Changes • Understand Exposure
3
Why do commodities affect currency?
• Economic growth and exports are directly related to a country's domestic industry • Correlation between commodity prices and currency • Tightest correlated currencies • Weakest correlated currencies
4
Relation of gold to oil
• From 1944 to 1971, US dollars were convertible into gold • Prices of gold and oil were fixed • After US ceased gold convertibility, OPEC producers were forced to convert excess dollars by purchasing gold • This increased prices for both gold and oil • Over past 50 years, gold and oil have exhibited positive correlation
5
Reasons for increasing oil prices
• Production initially increases as more wells are drilled in oil fields • After peak output is reached, oil production decline and becomes less cost effective • Earlier ratio was 50 to 1 and now it has reached 5 to 1 • With increasing demand, depleting oil reserves, oil prices are expected to rise
6
Contd…
• Increasing demand from emerging nations like India, Brazil, China resulting in demandsupply mismatch • Major oil reserves lie in politically unstable regions like Middle East, Venezuela and Nigeria
7
Oil and Currency
• Strong relationship between the global economy and the price of oil • Increase in oil prices - Gain in currency value for the countries with abundance of oil - Decrease in currency value for the countries depending heavily on import of oil
8
Oil and Canadian dollar
• Strong correlation • Canada is the seventh-largest producer of crude oil • Huge demand from US and China • Canadian dollar extremely vulnerable to