With Oil Prices Unsteady, Gold Reemerges As A Safe Bet
Commodities are subject the law of supply and demand. When the demand for a commodity is low, the price and production will fall behind. When the demand rises, higher production costs will stimulate the growth of the market and its suppliers until the commodities market reaches over production levels and demand lowers, along with the price of commodities. Fluctuations in the market occur for multiple reasons, including speculation, central bank reforms and government intervention. Regardless of the causes, commodity markets will always be cyclical in their nature. On one hand, prices of intraday commodities are determined by economic factors, including current demand and supply, access, inflation and credit fluctuation; on the other hand, bigger geopolitical forces influence the long-term performance of future contracts, and oil falls into this category. National crises, trading sanctions, natural disasters, oil spills and political unrest in countries are all factors that affect long term prices.
From a financial specialist’s perspective, it is vital to comprehend the point in a commodity cycle at which one should invest. Compared to other commodities such as oil, copper, and even corn, gold has the least correlation to oscillations in the economy. Trends in gold prices can continue for years, and in some cases, even decades. In the early 2000s, the price of gold crashed from $850 to $300/Oz in two years, and from 2002 to 2011, it rose from $300 to $1900/Oz. Yet the cycle for gold cannot be relied on to maintain a predictable trend at any given time. Gold has been trading in the downtrend direction since 2011. There have been several attempts to break this bearish trend, none of which have been successful. However, with growing global political tensions in 2017, gold prices are expected to move up and trade in the $1,350/1400 per Oz range. Another crucial factor impacting the price of gold is the U.S. dollar, with which gold shares an inverse relationship. While previously driven by Western investment, today the movement of gold is largely influenced from the East, particularly by countries like China and India, along with an increased physical demand. As gold is considered to be a reliable investment during turbulent market conditions, it is expected to better protect investments against system or non-diversifiable market risk than other investment alternatives.
In the case of crude oil, the most important and widely followed commodity, the market has been over-supplied in recent times. The emergence of North American Shale Gas had boosted U.S. inventories far more than the demand. From $110 and above in 2014, crude oil fell to almost $25 per barrel in 2016. In 2017, due to a surge in industrial activity in both the U.S. and China, the price has recovered to well over $50/barrel and is slowly advancing towards the $60/barrel milestone. According to the IEA (International Energy Agency), the long-term supply outlook suggests shortfalls and an increase in oil prices to near $80/barrel. Additionally, new oil discoveries in 2016 sunk to their lowest number in decades while the capital expenditure in the industry has fallen well below recent benchmarks. The IEA has urged industry players to continue their investments to make up for the years when prices dipped. But for investments to continue, oil production is required to hit roughly 20 billion barrels by 2025; an unattainable goal given that oil prices in the $50s are not enough to incentivize the new production capacities required. With an expected future increase in the demand for oil, supplies may not be able to grow at the same pace, meaning that we can easily expect a hike in prices and inflation over the next few years.
In the future, gold and primary commodities in general are expected to play a significant role in geo-political tensions. A war in the South China Sea or the Middle East could provide a massive boost to the prices of both commodities. It will be interesting to see the impact of the new Fed Governor on gold prices, while the price of crude will continue to be influenced by political upheaval in the Middle East and future supply cuts by the OPEC in the years to come.