Why Iraq Matters to Investors -- The Gold-Oil Correlation

Decades of war in Iraq have left the Persian Gulf nation in tatters and ripe to be overrun and overtaken. The recent multi-week offensive by a Sunni militant group called ISIS
(Islamic State in Iraq and Syria) presents the most serious threat yet to Iraq’s survival. And, the expanding hostilities, the further destabilization of the region, and the potential disruption of its vast oil producing capabilities, has sent gold soaring to safe haven highs!

So how exactly does oil influence gold? Simply stated, high oil prices are bad for the economy and often act as a harbinger of slowing growth, rising inflation, and fiscal trouble ahead. This has historically triggered a run for gold.

The recent incursions by ISIS, have been the main focus of the markets for the past few weeks as the marauding jihadist army has rolled across Iraqi cities and towns virtually uncontested. Their prizes have included Mosul, Tikrit, Tel Afar, Al-Qaim, Rawah, various towns of the Anbar province and something else … the Ajeel oil fields and the Beiji refinery.

Iraq is OPEC’s second largest oil producer and responsible for as much as 40% of global oil supply. A decrease or marked disruption in their exports could push prices considerably higher, while a complete stoppage could threaten the already tenuous world economy.

As ISIS has advanced across much of Northern and Western Iraq throughout the month of June, gold has surged $63 an ounce, climbing more than 5%. It is riding high on the prospects of pricier gasoline, higher manufacturing costs, and more expensive transit and transport fees brought about by an interruption in global crude. Rising oil prices are the bane of economic prosperity. Overpriced oil suppresses growth, weakens the markets, and puts pressure on the US dollar… all of which is bullish for gold.

The causal relationship between gold and oil is not a new phenomenon. In the mid-1970’s to 1980, the world was subject to the Arab Oil Embargo resulting in a 400% surge in oil prices. This triggered the prolonged energy crisis of the 1970’s. While the world was busy coining a new term for stagnant growth and rising inflation or “stagflation” … gold quadrupled in value.

Gold and oil are closely watched commodities and are associated with a host of vital economic indicators. When the dollar is strong, the economy is sound, and the world is at peace … oil tends to be moderately priced. It rises, however, when those conditions are reversed. While oil functions as a barometer of economic health, gold provides a safe haven for the world’s money.

Iraq currently produces an astonishing 3.3 million barrels of oil per day and has attracted multi-national companies like Exxon, Chevron and BP. ISIS, however, has reduced the Iraqi oil fields and refineries to war booty causing the world economy to contract.

From an investment standpoint, the gold-oil relationship is one to consider. For the better part of four decades, gold has provided a critical store of value in the face of global violence, border insurgencies, sectarian fighting, falling governments, rising terror, and major fluctuations in the supply and resulting price of oil.