The Relationship Between Oil and Gold
Each day in Saudi Arabia, more than five million high sulphur barrels of crude oil will be converted into low crude sulphur. Afterwards it will be transferred to refineries which are responsible for generating a variety of petroleum products. Saudi Arabia and other Middle Eastern countries represent a significant portion of international oil supplies, which influence gold in a number of ways.
How Gold Usually Performs When Oil Prices Rise
During the crisis in Suez in 1956, ten percent of international oil supplies were subject to restrictions which lasted six months, and caused the price of oil to rise by around 9 percent. However, gold coins didn’t increase much at the time since its price was still fixed by the U.S. government. The 1970s were a different story.
When the 1973 oil embargo was initiated by OPEC, 8 percent of international oil was subject to restriction and its price increased by over 200 percent. This caused gold prices to rise by 65 percent. Twenty four months earlier, then U.S. President Richard Nixon sealed gold’s window, which allowed the price to rise gradually over the following twelve months.
In 1978, during the revolution in Iran, oil prices rose again by over 100 percent, causing gold to shoot up in price by 163%. As you can see, any sort of instability in the Middle East tends to send oil prices higher, which then corresponds to a rise in gold.
Why Then Didn’t Gold Prices Spike During The Recent Arabia Turmoil?
Despite the recent missile attacks which occurred in Saudi Arabia, gold prices hardly moved, which is different from historical patterns. The reason for this is because the international market believes that Saudi Aramco can resume production quickly.
Within the first forty eight hours of the attacks, there was tremendous speculation about whether or not the Saudis would be able to recover from the damage, and how long. Investors poured over the satellite imagery of the damage and television analysts predicted (wrongly) that the damage would wipe out five percent of international production for an extended period of time.
However, the CEO of Aramco, Amin Nasser, revealed that the facility is still producing approximately two million barrels each day and plans to reach 4.9 million barrels daily (which was the production level before the attacks). This resulted in oil prices falling back to previous levels, an indication that global investors believe Mr. Nasser.
Should Gold Prices Be Higher?
Gold has performed exceptionally well in 2019, and many experts believe it should and will go higher, due to various geopolitical factors. However, it is easy to see why gold didn’t respond heavily to the Arab oil field attacks. The shock in oil price was brief and the nation appears to be recovering from the damage with ease. So although gold has historically followed oil in terms of price (since both are commodities), this isn’t always the case.