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Category — Gold-Oil Relationship

How the Federal Reserve Affects the Gold-Oil Relationship

After oil and gasoline prices continued their relentless march up earlier this year, it was nice to have some relief at the pump in May and June. However, since the end of June, prices of WTI crude oil is up over 15%, Brent crude oil is up about 25%, and retail gasoline is up over 7%. Oil and gasoline prices reached three-month highs last week and the Energy Information Administration (EIA) increased their 2012 forecasts of these prices.

There is no doubt that these higher prices will grab the attention of news outlets, policy makers, and the public. With this increased attention, political rhetoric regarding fantasies of governmental regulations and market manipulations will likely reemerge as catalysts to lower these prices.

The less likely scenario is increased awareness on the impacts that central banks, particularly the Federal Reserve, have on these petroleum prices by changes in the money supply. Over the period of this substantial rise in petroleum prices, central banks around the world have taken action from the dismal economic outlook in many global regions.

The U.S. GDP growth rate of only 1.5% in the 2nd quarter of 2012 and unemployment rate of 8.3% in July concern the Fed about economic stability, and several Fed governors recently called for additional quantitative easing measures—purchase of long-term bonds by printing more money. Although the Dallas Federal Reserve Bank President Richard Fisher opposes these additional measures (there are few marginal benefits versus costs), I examine the costs of monetary easing policy based on the relationship between gold and oil prices.

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August 24, 2012   3 Comments