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People who invest in gold and other precious metals to diversify their portfolios and store wealth have a clear incentive to keep an eye on market factors that impact the price of precious metals. Oil price shocks are an interesting factor to consider in this context.
The Russia-Ukraine conflict sent oil prices into a spin — and the latest oil price shock didn’t even start there. Oil prices had already been rising before February 2022.
The question is — how does the price of oil affect the value of precious metals? How might it affect you, as someone who’s invested in precious metals? Will your returns go up or down?
These aren’t simple questions to answer, but they’re worth exploring.
What Factors Impact the Price of Oil?
It’s helpful to understand the factors that impact the price of oil, sometimes causing oil price shocks, before we dive into how oil impacts the price of precious metals.
The global oil industry is still relatively young. It started in the 1800s and really took off during the 20th century. Major oil companies controlled the market when it first emerged, but when anti-monopoly efforts led to the breakup of Standard Oil, the market changed forever.
The foundation of OPEC (the Organization of Petroleum Exporting Countries, including Iran, Iraq, Saudi Arabia, Kuwait, and Venezuela) was another important milestone. OPEC gave oil-producing countries a framework through which to influence global oil prices. Political decisions can impact the global oil market as much as the open market.
Oil price shocks — sudden and significant upward or downward fluctuations in the price of oil — are usually caused by:
Global governments aren’t powerless against these price shocks, as they take steps to stabilize the oil market by building reserves and exploring new sources of oil. However, in this interconnected global economy, each fluctuation reverberates. The price of oil has a significant impact on the precious metals market, too.
How Do Oil Prices Affect the Precious Metals Market?
Oil price shocks generally hit during times of global political or economic upheaval, as we saw above. These uncertain times are also the periods during which people and governments often turn to alternative investments.
Gold, and to a lesser extent silver and other precious metals, have always been considered safe-haven assets. That’s to say, they are assets that serve as a secure store of wealth during times of uncertainty. People rush to buy gold, silver, palladium, and platinum when times get tough.
One study, titled Do oil prices and economic policy uncertainty matter for precious metal returns? New insights from a TVP-VAR framework, used the time-varying parameter vector autoregression model to assess how oil impacts the precious metals market.
Its conclusion? Oil price shocks (sudden and significant changes in the price of oil, whether up or down) generally have a favorable impact on precious metal returns. The way in which oil prices impact the value of gold has been most closely studied, but a similar trend has been observed when it comes to silver and other precious metals.
It’s never quite that simple, though. As commodity investment has become more popular, economic change isn’t the only factor that determines the price of precious metals. The laws of supply and demand also play a vital role, especially in the context of metals like silver, palladium, and platinum, which have industrial applications as well as serving as stores of wealth.
In some cases, the price of precious metals is driven down in the face of oil price shocks — likely a temporary effect. However, overall, the “safe-haven” status of precious metals stands strong. When the world’s in crisis, investors flock to gold, silver, and other precious metals. That drives the price up, leading to higher returns.
Oil price shocks may be bad news for people interested in investing in gold and other precious metals. They tend to drive prices up, and investing during times of turmoil can negatively impact your future returns.
Sudden spikes or drops in the global price of oil are, on the other hand, favorable for people who have already invested in precious metals. They get to enjoy higher returns and can ride the wave of economic distress, knowing they have invested in a safe-haven asset that will continue to provide financial stability in the future.