Is there an end in sight for gold and oil prices?

The above charts show oil and gold prices over the past year. Pretty similar increase; both going through the roof. A couple questions that come to mind are, Why are both oil and gold increasing at the same time? and Why would someone want to own gold? I'll answer these below.

1- Why are oil and gold prices rising together?

Oil, Inflation and Gold

Although the prices of gold and oil don't exactly mirror one another, there is no question that oil prices do affect gold prices. If oil prices rise or fall sharply, investors can expect a corresponding reaction in gold prices, often with a lag. There have been three major upward moves in the price of gold, one of which we are currently experiencing. The first occurred in the early '70s when oil prices tripled. During the same period, gold prices rose 2.5x. The second major price move occurred later that decade, when oil prices doubled. Over the same period, gold prices rose another 2.5x. The third period has been during the last year. As the charts above show, one year ago (5/1/07) oil and gold prices were about $65/barrel and $675/ounce respectively. Today, oil is trading at just over $119/barrel and gold is just under $900/ounce.

2- Why Own Gold?

There are six primary reasons why investors own gold:

1. As a hedge against inflation. Gold is renowned as a hedge against inflation. The most consistent factor determining the price of gold has been inflation - as inflation goes up, the price of gold goes up along with it. Since World War II, the years in which U.S. inflation was at its highest were 1946, 1974, 1975, 1979, and 1980. During those years, the average real return on stocks, as measured by the Dow, was -12.33%; the average real return on gold was 130.4%. Coincidence? I think not. Today, a number of factors are conspiring to create the perfect inflationary storm: stimulative monetary policy, a declining dollar, a spike in oil prices, a mammoth trade deficit, and America’s status as the world’s biggest debtor. This has caused commodity prices to reach all time highs across the board.
2. As a hedge against a declining dollar. Gold is bought and sold in U.S. dollars, so any decline in the value of the dollar causes the price of gold to rise. The U.S. dollar is the world's reserve currency i.e. it is the medium for international transactions, the principal store of value for savings, the currency in which the worth of commodities and equities are calculated, and the currency used as reserves by the world's central banks.
3. As a safe haven in times of geopolitical and financial market instability. There are myriad problems occurring around the world, any of which could erupt with little warning. Gold has often been called a 'crisis commodity' because it tends to outperform other investments during periods of world tensions. The very same factors that cause other investments to suffer cause the price of gold to rise. A bad economy can sink poorly run banks. Bad banks can sink an entire economy. Both of which we are currently seeing, along with gold soaring. As banking crises occur, the public begins to distrust paper assets/money and turns to gold for a safe haven. When all else fails, governments rescue themselves with the printing press, making their currency worth less and gold worth more. Gold has always risen the most when confidence in government is at its lowest.
4. As a commodity, based on gold’s supply and demand. Demand is outpacing supply across the board. Gold and other precious metals production is declining. It is very difficult to open new mines because it takes a long time, making it hard to address the supply issue quickly. There is growing demand in China and India, the largest gold-consuming nations.
5. As a store of value. One major reason investors look to gold as an asset class is because it will always maintain an intrinsic value. Gold will not get lost in a market collapse. It actually becomes a go-to investment during problematic markets. Historically, gold has proved to be an effective preserver of wealth for investors.
6. As a portfolio diversifier. The most effective way to diversify your portfolio and protect the wealth created in the stock and bond markets is to invest in assets that are negatively correlated with those markets. Gold is the ideal diversifier for a stock portfolio, simply because it is among the most negatively correlated assets to stocks. Although the price of gold can be volatile in the short-term, gold has maintained its value over the long-term, serving as a hedge against the purchasing power of paper money. For these reasons, exposure to gold in one form or another, is essential to having a truly diversified portfolio.

With that said, there are several ways to invest in gold. You can buy gold mining company stocks (ABX, AUY, GOLD, NEW are a few), mutual funds of these stocks (INIVX), closed end funds that mirror the gold price (GLD), or gold bricks or coins itself. If you think that oil will continue to increase you may want to look at the US oil fund (USO).