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Gold-Oil Link Strongest Since October on Europe’s Woes

Photographer: Jamie Schwaberow/Bloomberg

The link between gold and oil is the strongest in almost a year thanks to Europe’s economic woes.

After the five-year long bond between the commodities came apart earlier this year, the relationship is on the mend as the slowdown in Europe drives gains for the dollar. That’s bad news for bullion and crude amid less demand from investors for the raw materials as alternative assets.

Gold and West Texas Intermediate are both heading for the first quarterly losses this year, underscoring a bearish outlook from Goldman Sachs Group Inc. Prices are also falling as gains for the U.S. economy open the door for the Federal Reserve to raise interest rates, curbing the outlook for inflation.

“The dollar has been the main binding force between gold and oil, and now the slowdown in Europe and in the emerging world has helped the two reconnect,” Walter “Bucky” Hellwig, who helps manage $17 billion at BB&T Wealth Management in Birmingham, Alabama, said yesterday. “Both these investments have lost their luster, and we will probably see them continue to trade weak as money continues to flow into U.S. equities and the dollar.”

The 120-day correlation between crude and gold futures rose near 0.3 this week, the highest since October. A reading of 1 would signal the two moved in lockstep in the same direction, and minus 1 reflects opposite movements. The measure was negative in February for the first time since July 2009.

Inflation Expectations

The commodities have moved in the same direction in seven of the last 10 years. The link often reflects investors’ inflation expectations, according to economist Dennis Gartman. Slowing economies usually correspond to declines in energy demand and consumer prices.

The correlation had risen to 0.62 in April 2010, the highest since 1991, as investors diversified into commodities from the dollar and bonds amid unprecedented monetary stimulus in the U.S. The measure was at 0.27 yesterday compared with -0.1 on June 11.

The European Central Bank last week lowered its growth forecast for this year and next. The relative outperformance of the U.S. economy drove the Bloomberg Dollar Spot Index to 14-month high yesterday.

The Fed reduced its monthly bond-buying program to $25 billion on July 30, the sixth cut of $10 billion since November. Fed Chair Janet Yellen said Aug. 22 that if progress in labor markets “continues to be more rapid than anticipated,” interest rates may rise sooner than expected.

Quarterly Losses

Gold and oil “are wonderfully correlated again because of deflationary expectations,” Gartman said yesterday.

WTI crude has slumped 12 percent this quarter to $92.83 a barrel on the New York Mercantile Exchange. European oil demand is projected to drop 0.9 percent to 13.5 million barrels a day this year, according to the U.S. Energy Information Administration. The region accounted for about 15 percent of global demand last year, according to BP Plc.

Prices have also fallen on easing supply concerns. U.S. crude output will reach a 45-year high next year, the EIA predicts.

Bullion has declined 6.3 percent since June 30 to $1,239 an ounce today in New York. Holdings in exchange-traded products backed by gold fell in the past two weeks as a truce in Ukraine reduced demand for a store of value.

Money mangers cut their bullish wagers on the metal for three straight weeks as of Sept. 2, while those for WTI reached the lowest since March, U.S. government data show. Crude will drop to $90 in 12 months, while gold will reach $1,050, Goldman analysts forecast in a Sept. 5 report.

“The correlation between the two commodities may rise as the dollar and equities are the two most attractive investments,” Lance Roberts, who helps oversee $600 million as chief strategist for STA Wealth in Houston, said Sept. 9. “Even though there is so much turmoil globally, there is an absence of fear, and people don’t see the need to buy gold or fear disruption of oil supplies.”