• 12 hours Oil Pares Gains After API Reports Surprise Crude Inventory Build
  • 13 hours Elon Musk Won’t Get Paid Unless Tesla Does “Extraordinarily Well”
  • 13 hours U.S. Regulators Keep Keystone Capacity Capped At 80 Percent
  • 14 hours Trump Signs Off On 30 Percent Tariff On Imported Solar Equipment
  • 16 hours Russian Funds May Invest In Aramco’s IPO To Boost Oil Ties
  • 17 hours IMF Raises Saudi Arabia Growth Outlook On Higher Oil Prices
  • 18 hours China Is World’s Number-2 In LNG Imports
  • 1 day EIA Weekly Inventory Data Due Wednesday, Despite Govt. Shutdown
  • 1 day Oklahoma Rig Explodes, Leaving Five Missing
  • 1 day Lloyd’s Sees No Room For Coal In New Investment Strategy
  • 2 days Gunmen Kidnap Nigerian Oil Workers In Oil-Rich Delta Area
  • 2 days Libya’s NOC Restarts Oil Fields
  • 2 days US Orion To Develop Gas Field In Iraq
  • 4 days U.S. On Track To Unseat Saudi Arabia As No.2 Oil Producer In the World
  • 4 days Senior Interior Dept. Official Says Florida Still On Trump’s Draft Drilling Plan
  • 4 days Schlumberger Optimistic In 2018 For Oilfield Services Businesses
  • 4 days Only 1/3 Of Oil Patch Jobs To Return To Canada After Downturn Ends
  • 5 days Statoil, YPF Finalize Joint Vaca Muerta Development Deal
  • 5 days TransCanada Boasts Long-Term Commitments For Keystone XL
  • 5 days Nigeria Files Suit Against JP Morgan Over Oil Field Sale
  • 5 days Chinese Oil Ships Found Violating UN Sanctions On North Korea
  • 5 days Oil Slick From Iranian Tanker Explosion Is Now The Size Of Paris
  • 5 days Nigeria Approves Petroleum Industry Bill After 17 Long Years
  • 5 days Venezuelan Output Drops To 28-Year Low In 2017
  • 6 days OPEC Revises Up Non-OPEC Production Estimates For 2018
  • 6 days Iraq Ready To Sign Deal With BP For Kirkuk Fields
  • 6 days Kinder Morgan Delays Trans Mountain Launch Again
  • 6 days Shell Inks Another Solar Deal
  • 6 days API Reports Seventh Large Crude Draw In Seven Weeks
  • 6 days Maduro’s Advisors Recommend Selling Petro At Steep 60% Discount
  • 7 days EIA: Shale Oil Output To Rise By 1.8 Million Bpd Through Q1 2019
  • 7 days IEA: Don’t Expect Much Oil From Arctic National Wildlife Refuge Before 2030
  • 7 days Minister Says Norway Must Prepare For Arctic Oil Race With Russia
  • 7 days Eight Years Late—UK Hinkley Point C To Be In Service By 2025
  • 7 days Sunk Iranian Oil Tanker Leave Behind Two Slicks
  • 7 days Saudi Arabia Shuns UBS, BofA As Aramco IPO Coordinators
  • 7 days WCS-WTI Spread Narrows As Exports-By-Rail Pick Up
  • 7 days Norway Grants Record 75 New Offshore Exploration Leases
  • 7 days China’s Growing Appetite For Renewables
  • 8 days Chevron To Resume Drilling In Kurdistan
Alt Text

Expect Mine Closures In This Key Gold Mining Nation

Major gold mining nation South…

Alt Text

Can Mali Maintain Its Gold Mining Status?

Mali could be about to…

Alt Text

Did These Mining Giants Just Confirm The Next Gold Frontier?

After Ecuador’s President removed a…

Andrew Topf

Andrew Topf

With over a decade of journalistic experience working in newspapers, trade publications and as a mining reporter, Andrew Topf is a seasoned business writer. Andrew also…

More Info

Will Gold Be The Beneficiary Of Oil, Equities Plunge?

Will Gold Be The Beneficiary Of Oil, Equities Plunge?

Global stock markets were in turmoil again this week, with the Dow plunging 566 points on Wednesday before recovering to a 250-point loss, and the S&P 500 index bleeding over 3.5 percent to hit an intraday low of 1,820, the worst showing since February 2014.

The Toronto Stock Exchange, heavily weighted towards mining and oil stocks, at one point was over 400 points down, giving investors an eerie déjà vu of the financial crisis as the S&P/TSX composite index ended the day under the psychologically-important 12,000 mark.

The TSX has been down every day since trading resumed after the Christmas break and Wednesday’s close at 11,843 points was its lowest since 2013. The main Canadian stock board has lost over 10 percent of its value since Christmas and erased all of its gains since 2006, making it a “lost decade” for Canadian stocks, BMO Capital Markets noted.

Across the pond in London, the FTSE 100 crashed into bear market territory led by miners and oil companies, with London’s share index off by more than 3 percent, wiping almost GBP50 billion off the books of Britain’s leading companies. Related: Oil Prices Approach $26 After Bearish IEA Report

Worried about the IMF’s lower growth forecast for China and yet another take-down in the oil price, which settled at a once-unfathomable US$28.07 a barrel, investors bid down global stocks to their lowest level since 2013.

The only good news story of the day came for gold, which climbed 1.2 percent to $1,102 an ounce on the New York Mercantile Exchange. The precious metal is known for its safe-haven status and inverse relationship with equities. When stock markets are down, gold tends to do well. Conversely, when equities are on a tear, the appeal of gold fades among investors, with lower return potential and no dividend-bearing income.

Gold is also seen as a hedge against inflation, making it the beneficiary of loose monetary policy. Three rounds of quantitative easing in the United States pushed the gold price from around $800 an ounce in 2008 to an all-time high of $1917/oz in August 2011.

It would be tempting, given recent evidence of gold gaining and crude oil dropping, to surmise that the two events are related, with large numbers of investors selling oil stocks or futures and pushing them either into gold exchange-traded funds, the physical metal, or gold mining stocks.

In reality, of course, the relationship is far more complicated. Historically there has been a fairly tight correlation between the prices of crude and gold. Related: OPEC Still Sees Oil Markets Balancing This Year

In December 2014, a few months after crude started to fall, Kitco News asked what impact the declining oil price would have on gold and gold mining shares. Its conclusion? Not much. In a chart showing the correlation of gold versus oil, the precious metals news site found “a statistically significant” trend between gold and oil prices dating back to 1983.

While the drop in the crude oil price, at least in the beginning stages of the oil rout, did not equate to an equivalent fall in the gold price, “If the crude oil price slump is not temporary … then it’s reasonable to expect the gold price to move a bit lower so that the long-term relationship can remain intact,” the analysis reads.

One often-discussed factor in the gold-oil dynamic is how the lower cost of crude impacts gold mining operations and therefore the share prices of gold equities. An important input in the cost of gold mining, one would expect that a lower oil price would translate into lower fuel costs and therefore provide some relief to the operating margins of gold producers.

While the costs of gold mining have indeed dropped commensurate with a falling gold price due, in large part, to a strengthening U.S. dollar and improved American economy, resulting in a December decision to raise interest rates, the lower oil price can take little credit for this. An analysis last April by precious metals consultancy GFMS found that despite costs falling 25 percent between 2013 and 2014, at a gold price of $1,200 an ounce, almost half of the gold mining sector is losing money – with all-in sustaining costs of $3,000 an ounce.

Gold market analyst Lawrence Williams noted in a commentary that falling oil prices lopped just $8 an ounce off the cost of gold mining, compared to $70 an ounce represented by currency declines against the U.S. dollar in gold-producing countries, and mining at higher grades which accounted for $17 of the fall in costs.

Related: How Terrorist Groups Benefit from Low Oil Prices

Of course, the oil price has dropped considerably since Williams’ commentary, so gold miners could see better margins this year as a result, but that is likely to be outweighed by the other factors he mentions, i.e., a higher U.S. dollar in comparison to the currencies of gold-producing nations.

Discounting lower oil prices, a more accurate forecaster of the gold price is the value of the U.S. dollar, the inflation level and real interest rates.

As a commodity priced in U.S. dollars, when the dollar rises the gold price generally falls, because gold is more expensive to buy for holders of non-USD currencies.

Frank Holmes of U.S. Global Investors, a frequent mining and commodities commentator, said recently that real interest rates are not currently low enough to elevate the gold price. “When real rates drop into negative territory, gold has historically done well,” Holmes writes. He notes that real rates running at +1.68 percent (calculated by subtracting the consumer price index from the 10-year Treasury yield) “is a headwind for gold. That’s why we need inflation to pick up, because then gold would be more likely to rally.”

As to whether that is happening, economists are divided. Some believe the U.S. Federal Reserve will deliver on a promise to raise rates four times this year, due to a rise in the core consumer price index (CPI). Others believe there is less inflation in the economy than implied by core CPI, which has been rising for seven straight months.

Gold forecasting being an inexact science even in the best of times, traders are currently having a hard time deciding which direction the price will go.

Jeff Gundlach, CEO of Double Line Capital, a bond house, who correctly predicted the oil price crash, recently told CNN that he expects gold could rise 30 percent in 2016 to $1,400 an ounce. “This will happen as an equities bear market emerges, caused by slowing global growth and turmoil in China,” he said.

Another broker, Marex Spectron, said “We are still somewhat stuck for the time being, with not enough interest or buying to conclusively hold above $1,100, but with few participants wanting to aggressively short the market in the light of current conditions in the stock markets and China.” In a note to clients quoted by The Week, Spectron said. “I would look to trade a $1080-$1,100 range in the absence of any outside news or influences.”

Julian Jessop, a commodity economist with Capital Economics, said in an interview Thursday with Kitco’s Daniela Cambone, that gold and silver “are benefiting from safe-haven demand on the back of falling global equity markets, exacerbated by the recent oil price declines and escalating tensions in the Middle East.”

However despite his optimism for precious metals, Jessop lowered his original prediction of $1,400 by year-end to $1,250, telling Cambone he expects continued strengthening of the U.S. dollar and Fed tightening to be “significant headwinds” for the yellow metal this year.

By Andrew Topf of Oilprice.com

More Top Reads From Oilprice.com:




Back to homepage


Leave a comment

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News