Gold’s Relationship with Oil Flipped Around

Investors who saw little value in the metal last month, as plunging energy costs curbed inflation, have started buying in January even as crude continues to tumble. Bullion is off to its best start to a year since 1980 while West Texas Intermediate is trading near the lowest since April 2009. The correlation between the two commodities that reached a 16-month high in December is now the weakest in five months.

The about-face reflects an investor shift in focus away from the benefits of cheap fuel to the risk of economy-damaging deflation. Oil costs are so low that gold buyers are seeking a hedge against prolonged declines in consumer prices. They’re also bracing for currency volatility from more stimulus measures as policy makers in Europe and Asia look for new ways to revive growth. While the U.S. is expanding, the World Bank says that won’t be enough to buoy economies elsewhere.

“It’s clear that potential dislocation of what the falling oil prices may do to the market is bringing people to gold,” Quincy Krosby, a market strategist based in Newark, New Jersey, at Prudential Financial Inc., which oversees more than $1 trillion in assets, said by phone Jan. 14. “Worries about political instability because of falling oil prices and attempts to induce inflation are helping gold. Some of my investors are moving to gold.”

Bloomberg

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