Five factors favoring gold price upswing while oil tanks

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Australian Economy, Chinese Economy, European Economy, Macro Economics, UK Economy, Uncategorized, US Economy

The skyrocketing gold prices

Recently, we have witnessed a jump in the prices for the precious metal, gold. This in turn has led the Australian gold miners surge enormously amid the renewed Brexit fears. This surge was primarily attributed to –

Brexit impact: Britain’s vote to leave the EU (European Union), led to the turmoil in the markets and consequently benefitted gold, which rose to the highest since 2014. On June 24, 2016, gold futures prices for August 2016 passed their $1300 mark and surged about 4.6% to $1320, marking the largest one-day gain since February and its highest close since August 2014. However, on June 28, 2016, gold futures prices for August 2016 slightly corrected over 0.4% on easing fears of Brexit. The second wave of Brexit fears as seen again is letting to sell-off in global equity markets. The interest in gold has emerged from the recent volatility while the British pound has fallen to a post-Brexit low.

US economic state: Lately, IMF has cut their estimation of U.S growth to 2.2% from 2.4% for 2016. They have also warned about growing economic headwinds and “pernicious secular trends in income” could slow growth for the long-term. The IMF has also given a nod to the current Fed policy stance, indicating there would be hike in fed funds rate. This slowdown in the US also seem to drive the Gold prices higher. Gold is thus exposed to interest rates, particularly in the United States and higher rates raise the opportunity cost of holding non-yielding assets and lifting the dollar in which gold is priced.

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US Interest rates vs gold (Source: Thomson Reuters)

Drop in bond yields: The bond yields in Australia and the United States have already been dumped to record lows. A record low for the 10-year Australian Commonwealth government bond at 1.84% was noted on July 06, 2016 as Treasury yields dropped to 1.34%. Gold is generally said to strengthen when yields drop given the opportunity cost of holding gold is reduced.

Falling income from bank and government: This has also resulted into the investment in Gold, raising the demand influencing prices to upward moves.

Dollar Movements: Gold prices are highly influenced by dollar movements. The weakness in the dollar results into rise in precious commodity like gold, silver, and platinum. The dollar fluctuations have boosted the yellow metal price recently.

On July 07, 2016, spot gold price amounted to about $US1,364 an ounce.

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Gold price rally (Source: Financial Times)

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Fall in oil prices

From 1998 – 2008 oil prices have seen their best times, soaring more than 1200% but for over two years, oil is not performing that well. This is mainly because of these factors –

Rising production: Oil producing companies for quite some time are increasing their production to offset the falling oil prices impact while the US is focusing on low dependence on imports, resulting into high production. Last year, the US oil production surged to the highest level since 1970 while global output also reached record highs. Saudi Arabia said it would support oil freezing proposal only when the other regions follow this, and did not decrease their production. Kuwait recommenced production from its offshore field which was shut down since October 2014, and this is said to add over 300,000 barrels of oil per day. Russia is also producing more and had delivered 10.91 million barrels per day during March, which is the peak level since around 30 years, contributing to the ongoing concerns of the potential region’s support to freeze output. Even Non-OPEC members’ oil production rose 1.5 million barrels per day during 2015 driven by rising U.S. shale and offshore oil production demand based on U.S. Energy Information Administration (EIA) reports. Meanwhile, the U.S. Energy Information Administration petroleum report indicated that for March 2016 third week, crude oil inventories increased by 2.3 million barrels against the earlier week adding to oversupply concerns. International Energy Agency estimates that rising production would add to the ongoing oversupply and surpass the world oil demand of over 2 million barrels a day.  This rising production has also led to the pressure in the oil prices. The OPEC meeting on June 02, 2016 in Vienna, failed to agree on a clear oil-output strategy as Iran insisted on steeply raising its own production while Saudi Arabia promised not to flood the market. Tehran has also opposed any attempt to limit output to support weak crude prices. But a Reuter’s survey reported that OPEC’s crude oil production fell slightly by 12,000 bpd (barrels per day) to 32.5 MMbpd (million barrels per day) in May 2016 against the earlier month. The fall in production was due to decline in production from Libya, Nigeria, and Iraq. The otherwise rise in crude oil production from OPEC might have a negative impact on crude oil prices. On the supply front, oil production in Nigeria has now risen to about 1.9 million barrels per day (bpd) from 1.6 million. The EIA estimates that OPEC’s crude oil production would rise to 32.4 MMbpd in 2016 and 33.1 MMbpd in 2017 against 31.6 MMbpd in 2015.

Brexit Impact: Brexit referendum has impacted the oil prices with crude oil prices futures in August 2016 falling about 0.7%. The slip in the dollar along with Brexit affect the oil price.

June 30, 2016 also witnessed a drop in oil towards $50 a barrel at the back of the pressure by higher Nigerian output and softness in economic outlook post Brexit referendum. Brent has surged by 85% since the 12-year low of January. Oil did gain some support from tightening supplies in the United States with crude oil prices futures recovering over 4.17% and 0.48%, respectively in last week. But on a longer term basis, the oil prices seem to continue to be determined by demand and supply forces. Oil prices would also track the Dollar movements, FED’s decision on interest rate and Brexit-related events. On July 06, 2016, brent crude dropped 0.4% to $US47.79 a barrel following the 4.3% drop a day before while West Texas Intermediate dropped 0.5% to $US46.39. On July 07, 2016, brent crude was up to $US49.34 a barrel.

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