Correlation Between Gold Futures and Crude Oil

Can any of the company-specific risk be diversified away by investing in both Gold Futures and Crude Oil at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining Gold Futures and Crude Oil into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Gold Futures and Crude Oil, you can compare the effects of market volatilities on Gold Futures and Crude Oil and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in Gold Futures with a short position of Crude Oil. Check out your portfolio center. Please also check ongoing floating volatility patterns of Gold Futures and Crude Oil.

Diversification Opportunities for Gold Futures and Crude Oil

0.0

Correlation Coefficient

Gold Futures  Crude Oil

Pay attention - limited upside

The 3 months correlation between Gold and Crude is 0.0. Overlapping area represents the amount of risk that can be diversified away by holding Gold Futures and Crude Oil in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Crude Oil and Gold Futures is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on Gold Futures are associated (or correlated) with Crude Oil. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Crude Oil has no effect on the direction of Gold Futures i.e., Gold Futures and Crude Oil go up and down completely randomly.

Pair Corralation between Gold Futures and Crude Oil

If you would invest (100.00) in Gold Futures on December 28, 2024 and sell it today you would earn a total of  100.00  from holding Gold Futures or generate -100.0% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Flat
Strength	Insignificant
Accuracy	0.0%
Values	Daily Returns

Gold Futures  vs.  Crude Oil

Gold Futures

Risk-Adjusted Performance

Solid

Over the last 90 days Gold Futures has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, Gold Futures is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Crude Oil

Risk-Adjusted Performance

Very Weak

Over the last 90 days Crude Oil has generated negative risk-adjusted returns adding no value to investors with long positions. In spite of rather sound basic indicators, Crude Oil is not utilizing all of its potentials. The current stock price tumult, may contribute to shorter-term losses for the shareholders.

Pair Trading with Gold Futures and Crude Oil

The main advantage of trading using opposite Gold Futures and Crude Oil positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Gold Futures position performs unexpectedly, Crude Oil can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in Crude Oil will offset losses from the drop in Crude Oil's long position.

The idea behind Gold Futures and Crude Oil pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

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Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Portfolio Rebalancing module to analyze risk-adjusted returns against different time horizons to find asset-allocation targets.