GOLD PIPS CRUDE OIL AS GLOBAL FEAR GAUGE

Reserve Bank of India governor Sanjay Malhotra recently observed that gold has replaced oil as the barometer of economic uncertainty.

- BY DEEPA VASUDEVAN

In an economic landscape clouded by uncertainty-tariff flip-flops, shaky ships-the only constant is change. Not surprisingly, investors are piling into gold. The price of gold has soared, and is now over $4,000 per ounce. What is surprising, though, is the opposite response of oil-the price of crude has fallen by over 40% since early 2022, when it had crossed $100 per barrel in the wake of the Russian invasion of Ukraine. Oil markets do not seem to be pricing uncertainty in the same way as gold.

HISTORIC RISK BAROMETERS

HISTORICALLY, THERE has been a great deal of comovement between gold and oil prices, especially in times of crisis. The relationship is not perfect-there are leads and lags, and even occasional divergence. Gold prices barely moved when Iraq invaded Kuwait in 1990, but oil prices shot up. Similarly, as the global financial crisis unfolded from September 2008, gold was more stable than oil. In 2014-2016, oil prices plunged as US shale extraction led to a supply glut, but gold prices were range-bound. Notwithstanding these episodes, prices of both commodities usually react sharply to global uncertainty.

Gold is a safe-haven asset; its prices go up in times of inflation, war, pandemics or geopolitical uncertainty. Crude is linked to demand and supply; its prices fall when economic activity slows, as slower growth means lower fuel demand. So, gold and oil prices are both barometers of risk: gold responds to general economic anxiety, and oil to concerns about growth or supply.

SOARING RATIO