Crude oil is the term used for “unprocessed oil” and it is also known as petroleum. Crude oil is a fossil fuel that is naturally derived from decaying plants and animals. The various elements or compounds with which crude oil is made are carbon, hydrogen, sulfur, nitrogen, oxygen, etc. Crude oil differs in color from plain to tar black and this is because of its constituency. Hydrocarbon is the main element that contains a lot of energy and that is the reason why crude oil is used in producing many forms of energy like gasoline, diesel and others. Hydrocarbon is considered as excellent element because it is used in many forms. Like if we chemically treat the hydrocarbon in different ways many things can be made out of this like synthetic rubber, nylon, etc. It is believed that due to its high energy density, plenty availability etc, crude oil has become the world’s most impressive source of energy. It is estimated that the present utilization of crude oil is about 90 million barrels per day. Studies reveal that proportion of oil is plummeting as petroleum recovery is getting intrinsic. Because of these increased in consumption level, the reserves would be gone and may lead to global energy crisis. Not only this, crude oil releases carbon dioxide when they are burnt and which has bad impact on the environment and which led to global warming.
Nowadays crude oil has been capturing many news headlines worldwide whether high or low. Crude has been throwing its sense of importance to the consumers globally for the past years. In the past many economies had failed to face crude oil price shocks of 1974 and 1979. Most economies both developed and developing had knowledge and are prepared to face these shocks. Between 2001 and 2004, crude oil was in the range of $US 20 and $US 40 a barrel and it rises to $US 70 a barrel in 2006. The crux was basically the reason of rise in prices of oil which was the mismatch between the demand and supply of refinery products. It was recommended to increase the output if the prices continues with this range and they did the same in 2006 and due to this the crude oil prices have touched the year’s low and had come down to 30% of its high.
Gold is odd as commodity in that operates a little differently than the other commodities because of its lower demand for industrial products. As opposite to other metals like silver and copper, gold’s demand is not the primary factor in its price movements with Indian weddings being one of the areas where gold is demanded. There are of course other things like regular jewelry and some industrial uses but those uses are not related to the use of other uses like industrial purposes. One must look to certain point to find out or analyse where the price of gold will move and one area could be inflation. Another element that must be watched is government interference where it can have direct impact on gold price movements. When thinking of gold as a wealth building tool, its more difficult to make happen than other precious metals, although those committing themselves to know the gold market and gold companies making money. But as have seen it’s primary purpose is safety and inflation hedge. And the major factor which may also be seen is that to watch how much money Federal Reserve or whoever it is that prints money in your country is printing. At last to say that “by definition, inflation in printing money and the effects of undervaluing of currency and the resultant inflation is what gold investors need to watch more than anything else.”
The only way which rises scope for gold is the price of oil rising to standard levels Its partner i.e. oil is linked to gold whether it is in bad situation or good situation and they are trading within a well defined range and are related to each other. This happens as the price of oil rises, the price of gold follows the same route. The recent trend on the both of the commodities gives a clue for the future direction of the prices of gold which is regarded as a safe investment in uncertain times. Although the relation of gold and oil is interrupted and is done occasionally. Focusing back that is thousands years ago, gold which is the most precious metal among other metals has a long history as a store value of time. As the techniques to refine crude oil was first developed in the year 1850, oil has become one of the important commodities since then. It has been seen that as oil is more expensive among other energy commodities, it pushes up the price for the energy and thereon money flows to the safety of gold as a hedge against inflation. The closer correlation between the rising price of gold and oil provides the answer to the future direction of the gold price. Inflation is the single biggest threat rising in the shadows of global economy replacing the credit requirement or credit crunch as the most serious threat to economic stability. The economies of India and China are still growing fast but not as fast as they were earlier. Rising inflation has cut consumer demand for gold in India by half as consumers wait for the price to fall to more affordable levels. This was a part of trend that has seen consumer demand for gold fall globally. So the question arises : with plenty of gold and oil already in the system why are price rising if real demand is falling? Speculative demand for oil and gold goes some way to explain the year’s increase in prices. But this is not the only factor, the other factors could be the political and economic factors that threatened the world into global crisis. Earlier there was the threat to supply. Attention has been focused on events with investors seizing opportunities when the supply of oil and gold is threatened. Another factor is the increasing tension developing in US. More expensive energy will act to slow growth worldwide as inflation rises and government tighten fiscal policies in the hope of controlling inflationary pressures. There is expectation to see gold and oil continue to break records this year with nightmare scenario of $200 a barrel looking ahead more likely to increase. If this happens, gold as a hedge against ensuing inflation will also be pulled upwards to record highs. The long term average old to oil ratio is 15 barrels of oil to one ounce of gold. An ounce of gold at current price will buy the customers around 7 barrels of oil. With oil moving relentlessly towards $140 a barrel, makes a powerful case for investing in gold right now. It has been seen since that gold and oil have a positive correlation. When oil prices rise, there is upward pressure on inflation. This enhances the use of gold as an inflation hedge.
Impact of oil & gold prices on the stock market is inversely proportional. A shoot in the prices leads to fall in the stock market. And a decrease in oil & gold price on an average leads to higher stock market return. So the effect of both the prices are predictable in the stock market. The effect is profound when it increases 50% to 100% annually. The reasons being:
For eg. A decrease in the prices by 10% in US will result in the expected return to double up on the stock market in the following month. Though the stock market moves in the opposite direction with respect to oil and gold prices, it is basically a one way traffic. The stock market returns has no impact on the crude oil and gold prices. The entire stock market does not get equally or at the same time affected by the fluctuation in oil prices. The US industrial sectors get most affected with the rise in oil prices. It has been advisable to hold on to energy stocks shift focus from the mass market to general retailers. This is the reason why mass market retailers ought to be avoided with respect to stock investments.
There are certain inputs which impacts the economy of the world as a whole like the price of oil. The certain elements that make up the basis for analyzing the global economy. The cost rises for transportation companies if the oil prices increases and thereby reducing their profit margins and inturn forcing them to increase their prices, similarly affecting all other companies that rely on them to transport products and people. By contrast, most energy companies benefit from higher oil prices because of increased demand for substitute energy sources like ethanol etc. The time period of my analysis part was bad time for most energy companies. Hence it has been proved that the oil prices are positively related to commodities market.
The term paper discusses the correlation between the oil prices and gold prices and that has been done on monthly basis and their impact on both commodities and stock market. The study reveals about the trends in crude oil prices from the past few years. It also shows about the correlation and it has been observed that the oil prices and gold prices are positively correlated overall but if we see on monthly basis then it has been seen that sometimes it is positively related and sometimes negatively correlated but mostly positive. Not only this, the paper also reveals their impact on commodities market and it has been analyzed that the prices of crude oil is positively related to commodities market but negatively to stock market. It has been observed that the change in the price of oil and gold has no impact on the stock returns. Thus it is advisable for the consumers to invest in the commodities by analyzing the entire market and calculating the returns thereof.
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