Crude Oil Analysis: Relative Prices, Correlations and the Gold-Crude Ratio

In the following series of posts, we shall delve deeper into analyzing crude oil in terms of its relative price in different currencies, the correlations between different currencies and oil prices, and the correlation between crude oil and gold.


Crude Oil Analysis: Correlation of Crude Oil Price with Gold Price

We shall now look at the correlation that exists between the prices of crude oil and gold.

With a 5-year average correlation of 0.28, gold prices appear to have a low correlation to WTI. In the prices graph we see that gold prices have generally had a consistent long term upward trend, whereas WTI prices have markedly changed direction more than once over time. However, from a 60-day trailing correlation perspective, the correlation between the prices of these commodities appears much stronger than that indicated by the average correlation above, with the 60-day trailing correlation exhibiting several instances of moderate to high positive correlation, the most recent of which was during the third and fourth quarter of 2010.

Currently, 1 barrel of WTI is equivalent to 0.074 troy ounces of Gold which is the same as its level one year ago in March 2010, but up from a low of 0.0541 end-May 2010, indicating that WTI has regained lost value over this time (even though it had edged up a bit higher to 0.0786 in early Jan 2011 when Gold prices plunged by USD 231 for a day). This is consistent with the new average level of the WTI/Gold price ratio experienced since the third quarter of 2008.


Trailing Correlations

Gold Crude Ratio