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What Can Oil Prices Tell Us About the Dollar and Gold?

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Typically, a strong dollar is considered one of the greatest “enemies” of gold and precious metals prices. In fact, a relatively strong dollar has created headwinds for gold for months.

Another interesting commodity we can take a look at is oil. Historically, oil and the USD have a negatively correlated relationship, with oil being one of the most inflation-sensitive commodities out there. However, this wasn’t the case late in April. Oil surged to around $65/barrel (WTI). The price has eased a bit since, but it is still trading in the $62/barrell range.

Peter Schiff talked about rising oil prices during an interview on RT last month. The main reason for the price surged was Trump’s announcement that the US would tighten sanctions on Iranian oil exports. But the price of oil had been creeping upward even before that announcement.

The Fed has used low inflation as part of the justification for the “Powell Pause.” Relatively low oil prices were one factor keeping CPI low. But as Peter noted,  oil prices have risen some 40% since the last time the central bank nudged rates up.

When oil prices rose in April, the negative correlation between the price of oil and dollar strength broke down. The USD also rose, prompted by a better outlook in the equities markets (strong company earnings, trade talks with China resuming soon), as well as the debt markets.

A similar situation happened last year between the months of May and July. However, the dollar won, resulting in a collapse of oil prices.

This time around, there is evidence to believe that the opposite will happen and the dollar will collapse. This would likely induce precious metal prices to rise.

What’s new this time around?

The CoreCommodity CRB index, which is a benchmark for all commodities, has been rallying. Last year, the opposite was the case. All commodities were in decline (and hence the index was in decline). This could be seen as a proxy for the eventual collapse of an oil rally. With the strong commodity index in an upward trajectory, the oil rally has support this time around. Because of the oil-USD relationship, we can project that the greenback will likely be pushed lower, prompting gold and inflation sensitive commodity prices to rise later this year.

During his RT interview, Peter said that Trump will make excuses about rising oil prices in order to deflect blame. In fact, prices are going up anyway. The restrictions on Iranian imports will just exacerbate that. But Peter said the real problems will start when the dollar finally starts heading lower.

The only thing that was propping up the US dollar over the last several years was the false belief that the Fed was going to be able to normalize interest rates and shrink their balance sheet. Well, the Fed has now admitted they’re not going to do either. So, all of the props that were underlying the dollar have been knocked out, yet the dollar is still up there. It hasn’t collapsed yet. But I think it will when the market recognizes the significance of what happened. And that just going to add more upward to an oil market that’s already going up.”

This report was prepared by SchiffGold intern commodities analyst Jason Mezhibovsky. Jason is a sophomore at Binghamton University studying finance.

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