Trading Nation

What you might not know about oil and gold

Here's the next commodity to fall

The multi-year commodity crush has intensified in July, with gold and crude oil falling another 6 percent and 15 percent, respectively. This as the U.S. dollar has continued its climb. But there may be a risk simply to putting both into the basket of "commodities" and consequently assuming they will move in lockstep.

Sure, both oil and gold are negatively correlated with the dollar; as the dollar rises in value, it should generally take fewer dollars to buy the same amount of the commodity.

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And likely thanks to their twinned ties to the dollar, crude oil and gold have seen fit to move together, with an average correlation of about 16 percent (based on an average of 36-month rolling correlation figures going back to 1970, provided by Convergex).

But, as oil and gold have seen fit to fall at sharply different rates recently, and reacted differently to global events—with oil partially serving as a barometer of optimism (or more accurately, pessimism) around global growth while gold has risen on geopolitical concerns, the correlation between the two commodities has turned sharply negative of late.

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Over the past 12 months, oil and gold have seen an average daily price change correlation of negative 25 percent, according to Convergex. Even over a 36-month horizon, an average correlation of negative 5 percent has been seen, as of the end of June.

"Despite the dollar being inversely related to each, the fundamentals alone are more powerful than the dollar strength," commented Jodie Gunzberg, global head of commodities at S&P Dow Jones Indices, and the manager of the popular S&P GSCI and Dow Jones Commodity Index. "The returns of gold and oil are separated by fear and greed that decouple the two."

Still, the desire among investors to group the two popular commodities together remains strong.

"People think about trading in terms of baskets," said Rich Ross, technical analyst with Evercore ISI. "People talk about a 'bundle of commodities,' and that's just what they do—bundle them together. They buy or sell first and ask questions later."

Needless to say, over the past few months, those people have been putting a lot more emphasis on the "sell" button.

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