Correlations in Gold, Oil and Dollar Value index - Essay Example

Where oil is the need for global economics, same is the case with gold being the need of every central bank of the world to buy gold in exchange of providing the open market with more currency and to balance trade imbalances in international markets. The US Dollar is no doubt the major player in the world regarding trade and forex exchange, but it is gold and oil that counter the weight on the other side of the global trade seesaw (Zvi Bodie; Alex Kane; Alan J Marcus, 2005). The correlation of gold and dollar is a years old tradition for investments and a leverage to control currency devaluation.

Investors around the world generally use gold as a tool to control the economic activities that go around the country and in international market. However, the main roots of gold standard for currency started with the beginning of central banking system. The correlation between gold and dollar can be understood by a simple fact that when there are more cash currency in the market, the people will be able to buy more precious metals. Gold being one of the most precious metals in the world and used as an investment, people always try to convert their cash into gold for better returns in the future.

More paper currency at the disposal of the people will mean that the worth of that currency is low and people are able to buy more gold from that therefore causing the currency paid to get that amount of gold to rise. This means that dollar and gold have an inverse relationship. The market works more on the supply and demand system. The gold has been the center of attention as a precious metal since times immemorial and always in demand. Although there has been a lot of mining on the gold throughout the world but the demand never ceases.

Just like any business, where people invest to get better returns with the expectation of the business to grow, gold has proven tendency to grow in cost over time. More currency in the market results in lesser gold available for purchase because of rise in competition therefore higher the price of gold (Ambrose Evans-Pritchard, 2010). The price of oil in the international market results in inflation because of rising prices for production and transport therefore negatively effecting the price of the dollar.

The price of dollar is affected because the consumers are not able to buy the products that are available in the market therefore demanding more currency in exchange of the products therefore decreasing the value of the currency. As the amount of oil production is reaching all time high and with the rise in industries resulting in increase in the demand of oil, the major oil consuming countries like USA, China and India have started to store oil as reserves. In exchange, these countries give out dollars to the oil producing countries, putting the same inverse impact as gold has on dollar.

USA being the largest consumer of oil in the last 30 years, consumes almost 25% of the total oil production that is being drilled in the world to support the mere 5% of the global population. In return to get more oil, not only to use but for keeping it as reserves, the Americans are pumping dollars into the accounts of oil producing companies, therefore tilting the trade balance in their favor. India and China followed by many European countries follow the same lead therefore keeping the demand of oil on a consistent