FTSE 350 | FTSE 350 Companies

Crude Oil, Gold and Mining: Where Next?

While the price of crude oil and gold are historically linked, investors looking for greater insight into the future of the commodities markets can also compare their relationship with the FTSE 350 mining sector index.

The rise of gold prices over the last five years has been fuelled in part by investors buying in anticipation of buoying oil prices raising inflationary pressures. This allowed gold to track the performance of oil, and vice versa, and investors could plot their strategies in line.

However, our research analyst Anthony Grech has considered the relationship between crude oil, gold and the FTSE 350 mining sector index to produce a basic model which tracks the market price of gold and the index.

Below is a summary of the latest free report from IG Index. You can access the full version in the TradeSense Databank found in the PureDeal platform.

Plotting gold's relationship with mining

By correlating the prices of crude oil (WTI), gold and the mining sector from 28 December 1990 to 18 July 2008, we can calculate the linear regression of the independent variable and dependent variables. Using linear regression models with a line of best fit, the results clearly show that there is a strong positive relationship between the price of oil and gold, with around 81% of the price variations in gold being attributed to movements in the price of oil.

The relationship between gold and the FTSE 350 mining sector was also found to be significant, with 86% of price movements in the index explained by the price of gold.

Utilising model forecasts

With the price of the FTSE 350 seemingly well associated with the price of gold, and gold linked historically with the price of crude oil, investors will inevitably look to the price of oil as a critical input in their calculations.

And while it is exceptionally difficult, if not impossible, to precisely predict the future price of oil, all the signs point to a continued downward trend. Using this and historic data from 1990 to 2008 to test the gold and FTSE 350 mining models, we can see that they are fairly accurate at tracking market prices in the long term. However, they are subject to large deviations where the model does not take into account other overriding factors such as currency exchange movements.

Follow your views

With IG Index you are able to make the most of your calculations and trading strategies, whatever your view on the future of gold, crude oil or the FTSE 350. We offer a range of markets to suit your needs, including Spot Gold, Crude Oil and Mining sector trades over a range of forward months.

Speculators can take a position either long or short of their chosen market, backing their theories of more downside or a recovery in prices. And with our full range of risk management tools, including Trailing Stops and Guaranteed Stops, you are able to limit your liability without putting a ceiling on your potential profit.

Take a more in-depth view on the FTSE 350 mining sector and its relationship with gold and crude oil with our free specialised report from IG Index analyst Anthony Grech, available to all clients. Apply for an account and get set up in minutes.

The above comments do not constitute investment advice and IG Index accepts no responsibility for any use that may be made of them.