Gold and oil prices are both down. Here’s why that matters

Oil prices have fallen to pre-Iran war levels, trading in the $70-a-barrel range, while gold prices have been slowly trending down for months. But are these trends correlated? 

At first glance, declining oil and gold prices could suggest a cooling economy and easing inflation concerns. That’s because both these commodities react to economic uncertainty.

But there are more forces at play right now, and the prices of oil and gold don’t, in reality, show a very strong correlation. 

Here’s what you need to know about the connection between oil and gold prices, and what it means for precious metal investors.

Are oil and gold prices actually related? 

The prices of oil and precious metals, like gold, are loosely related, but they don’t necessarily move in tandem. Two forces cause this. 

For starters, inflation is a major factor connecting the two.

“Oil and precious metals often benefit from the same inflation story. Higher energy prices can fuel inflation, which tends to support demand for gold and silver as stores of value,” says Christopher Hodge, former principal economist at the Federal Reserve Bank of New York and head economist at Natixis CIB Americas.

Geopolitical conflicts can reinforce this relationship. Conflicts can disrupt supply chains and cause oil prices to shoot up – like what we saw at the start of the Iran war. This pushes inflation higher, prompting more investors to purchase gold and other metals as a hedge against rising prices and uncertainty. This heightened demand can increase gold prices. 

But that’s not the full story. Other forces weaken gold's and oil’s correlation. Oil prices are mostly determined by perceived supply and demand, while gold prices also react to other macroeconomic forces. 

“While oil has pulled back, precious metals are still finding support from central bank buying, large fiscal deficits, geopolitical uncertainty and lingering concerns that inflation may not be fully defeated,” Hodge says. 

Why oil is back under $80 a barrel

Oil prices have fallen to pre-Iran war levels in recent weeks as tensions between the U.S. and Iran have eased, reducing the geopolitical risk that pushed them higher. 

Other factors pushing prices below wartime highs are increased supplies from Russia and Venezuela, as well as weaker demand from China amid slowing economic growth, according to Purba Mukerji, professor of economics and expert in international finance and trade at Connecticut College.

Why gold has trended down 

While oil has been declining for a few weeks, gold prices have been slowly trending down for months after hitting record highs of more than $5,000 in January. 

One macro factor driving this is the prospect of higher interest rates. Rising rates make income-generating assets like bonds and stocks more attractive than gold and other precious metals, which don’t pay dividends. “An increasing Fed path for interest rates has made non-yielding assets a bit of a liability,” says Darrell E. Fletcher, managing director of commodities at Bannockburn Global, a capital markets trading firm. 

A strong U.S. dollar also contributes to weaker gold prices. Because gold is sold globally in dollars, a strong greenback makes gold more expensive for international buyers and decreases demand. However, budget deficits and strong central bank buying continue to support gold’s price in the long run. 

What’s next: What falling oil will mean for gold

Oil and gold prices have both been decreasing lately, but for largely different reasons. Still, there is a message we can glean from both: “The decline suggests markets are becoming less worried about inflation tail risks and major commodity shocks,” Hodge says. 

That’s because gold and oil prices both tend to rise during times of uncertainty and high inflation expectations, and fall when those pressures ease. 

But in practice, that relationship is not so straightforward. While declining oil prices could theoretically reduce inflation and put downward pressure on gold prices, other factors realistically outweigh this. 

“We believe oil’s selloff primarily reflects expectations for shorter-term inflation relief from the war-driven supply shock, while gold’s correction reflects a tighter monetary policy stance and the recent rise in real yields,” says Jordan Rizzuto, managing partner and CIO at GammaRoad Capital Partners.

As a result, even though oil and gold are both moving lower, the correlation between the two is still weak. 

Bottom line: What falling oil and gold prices mean for investors

Because oil and precious metals are both influenced by inflation fears and geopolitical tensions, it’s easy to assume their prices move together. 

But ultimately, “they’re driven by different fundamentals,” Hodge says. “Oil is largely a growth and supply-demand story. Gold is more of a real rates and uncertainty story. Sometimes they move together, but often they’re telling different stories about the economy.”

For investors, this means that a downward trend in oil prices doesn’t necessarily determine where gold and silver will go next. While lower energy prices can help ease inflation, putting downward pressure on precious metal prices, other forces like interest rates and the strength of the U.S. dollar play a larger role. 

Investors should instead consider oil as one part of a larger equation. If lower oil prices contribute to an overall lower inflation outlook, this can determine how the Federal Reserve sets interest rates. Which, ultimately, has a more significant impact on gold than oil prices directly.