Correlation trading can be done within the oil markets. Crack spreads are a good example, as is the spread between Brent oil and WTI. But correlations are to be found everywhere and can be traded whenever you please.
Ratios and relationships can be effective instruments to hold on to. Trading gold and trading oil at the same time gives rise to serious thought about a relationship regarding their prices.
Of all commodities, the price of gold is probably the least determined by the fundamental forces of supply and demand.
The gold price is heavily influenced by speculators, which makes it difficult for investors to analyze and to conclude what will happen next. That's why you, as an investor, have to rely on ratios as well as charts. These at least provide you some sort of grip.
That's why I would like to refer to the ratio between the price of oil and the price of gold. Over the last three to four decades, this ratio reflected that the price of gold was, on average, the equivalent of 17 barrels of oil. Right now this ratio is somewhere between 10 and 11.
Gold price to hit $1,000
Based on this, as well as on the current oil price of $60, you can conclude that the price of gold is about to rise from the current $635 to $1,000 (or that the price of oil is going to collapse to $37 if you turn around the starting point from a given oil price to a certain gold price).
The current price of $635 is still far away from the May 2006 high of $728, but once this level has been broken, the magic level a $1,000 will show up, according to the above. The uptrend that finished with the high of May 2006 ended because of the rise in interest rates all over this world.
Commodity prices fell because a rise in interest rates slows economic growth and, therefore, the demand for commodities. The fact that gold is normally a safe haven could not stop the price from falling in this particular case.
Weakening US dollar
Hedge funds also liquidated their long positions and this was the temporary end for the support of the price. Now that the dollar is weakening, gold is getting cheaper for investors outside the States.
This will automatically lead to a rise in the gold price. The dollar weakening may accelerate because of increased uncertainty due to the upcoming elections.
But stay sharp; central banks continue to sell large quantities of their gold. This will not end in 2007.