Oil prices have been rising to historic proportions. The demand for oil has increased across the world. With nations developing their infrastructure at a fast pace and populations increasing exponentially, the demand for oil has exceeded the amount of oil that can be produced. Because of this, oil prices are setting record highs. All of this can affect the gold investor. Oil prices and gold prices have a strong correlation with each other. Here are some of the minimum ways rising prices on oil affect gold prices.
Gold occurs naturally in the earth; but it must be mined in order to use it. The process of gold mining is highly oil-intensive. This situation has increased in recent years with the mining companies having to mine deeper and deeper to reach the caches of gold in the earth. Therefore, oil prices have a direct and substantial effect on the cost of gold mining. This cost increase is passed on to the overall price of gold.
After the gold is mined, it must be refined into a useable form and then shipped to various central banks and gold depositories. Like the cost of gold mining, the cost of gold refining and shipping is affected by the oil prices. Gold refining requires oil for the equipment used. Shipping the gold, while not requiring actual oil, does require fuel for the transporting vehicles. Fuel prices are directly related to oil prices. When they rise, the costs of these two processes also increase. This increase eventually manifests itself in the gold market.
Oil prices also have an effect on the demand for gold. When they increase, inflation usually follows. Inflation brings falling dollar prices, which, in turn cause an increase in the demand for gold. Gold actually looks very attractive this time because its value will have been increasing due to the increasing costs of mining and refining.
Once investors begin pouring their money into gold market, the laws of supply and demand take over and gold prices see a large increase. This is how oil prices affect gold prices. They increase the costs to acquire gold, refine it, ship it, and also the demand for gold. Keeping watch on oil prices is one more way to anticipate a change in gold prices.