Hugh Hendry asked on X: ᴡʜʏ ɪꜱ ᴏɪʟ ᴘᴜᴋɪɴɢ ᴡʜɪʟᴇ ɢᴏʟᴅ ꜰʟʏꜱ?
It got me thinking:
Aside from the obvious feedback loops, convexity, asymmetry: paper vs physical markets, institutional accumulation/exodus, the financialization paradox, etc.
Oil faces a unique currency dilemma that gold does not. Oil producers (especially Gulf states) historically recycled petrodollars into US assets and this created structural dollar demand, supported dollar, and supported US deficits, as petrodollar system weakens (Im not saying collapse), this recycling mechanism breaks down. Result is less structural support for oil prices from monetary system. Gold is money itself, not priced in money (philosophical but practically relevant). Central banks buying gold ARE the monetary system (not dependent on it). Gold benefits from ALL currency uncertainty (dollar, euro, yuan) Result is gold has structural support from monetary system fragmentation.
Petrodollar system created artificial paper demand for oil (to get dollars). As this system weakens, oil loses this artificial support and oil demand becomes purely economic, not monetary. Thus negative for oil prices.
Dollar system created artificial suppression of gold (competing with dollar as reserve) as this system weakens, gold regains a monetary role and gold demand becomes both economic AND monetary. Thus, positive for gold prices.
Let’s break it down.