Oil Collapse Gives Gold a Push
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Oil Collapse Gives Gold a Push

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Alejandro Ehrenberg By Alejandro Ehrenberg | Journalist and Industry Analyst - Tue, 04/21/2020 - 16:22

While experiencing some volatility, the price of gold in April has remained close to the psychologically important threshold of US$1,700 per ounce. At the same time, oil prices plummeted, in what Peter Appleby, analyst at Mexico Business News, has described as “an unprecedented downward spiral.” Indeed, the US benchmark has fallen below zero for the first time in history.

Mexico Business News has published an infographic showing some of the main factors influencing gold price. Among the key short-term influencers is monetary policy. When interest rates are low, investors seek out gold, which does not yield interest. Also, geopolitical and macroeconomic unrest tends to turn investors to gold, as the metal has historically been a safe store of value. Moreover, rising inflation tends to push gold prices upwards: when the value of money decreases rapidly, investors bet on gold as a protection.

However, the relationship between gold and oil is not as widely understood as the one between the metal and the variables mentioned above. The US Money Reserve, one of the largest distributors of US government-issued gold, silver and platinum coins, has produced a simple explanation of the connection among the two commodities.

First, the US Money Reserve article notes that “gold and oil prices tend to move in tandem,” but their linkage cannot always be described as “apples-to-apples.” The factors that influence this linkage go back to the ones noted in the previous paragraph, like inflation. As the US Money Reserve points out, when oil prices go up, inflation increases, too. High inflation usually means rising gold prices. Furthermore, the US dollar has historically been another factor in the connection between gold and oil. Drawing on research by MarketRealist.com, the US Money Reserves says that “when the US dollar rises, the prices of gold and oil typically fall. The opposite normally occurs when the US dollar falls.” This is due to the fact that gold and oil are dollar-denominated assets. The article concludes that gold and oil are for the most part positively correlated, albeit the price of oil being more volatile.

All of this makes one wonder why gold is holding its ground while oil is on an uncharted journey down the proverbial rabbit hole. Claire Ballentine, in an insightful piece for Bloomberg, explains that “anxious traders watching oil’s collapse have been piling into gold in a bid for safety, but the dollar’s rally is simultaneously pushing down prices.” Even if a momentarily stronger US dollar is playing against gold, the metal’s safe-haven quality is heavily drawing investors to it in a time of deep uncertainty about the world’s economy. As JP Morgan famously said, gold is money, everything else is credit.

Nonetheless, Jim Wyckoff, analyst at Kitco, called attention to the possibility that “the bullish trend (in gold) might not last if oil prices are low for too long." Wyckoff goes on to explain that "near-term, it is bullish for gold from the sense of making for safe-haven demand amid a very anxious marketplace. However, if oil prices stay very low for an extended period of time, that would be bearish for gold — suggesting commodity price deflation." 

Photo by:   Public Domain Pictures

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