Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
US Economy and Stock Market Addicted to Deficit Spending - 17th Oct 21
The Gold Price And Inflation - 17th Oct 21
Went Long the Crude Oil? Beware of the Headwinds Ahead… - 17th Oct 21
Watch These Next-gen Cloud Computing Stocks - 17th Oct 21
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21
CISCO 2020 Dot com Bubble Stock vs 2021 Bubble Tech Stocks Warning Analysis - 6th Oct 21
Precious Metals Complex Searching for a Bottom - 6th Oct 21
FB, AMZN, NFLX, GOOG, AAPL and FANG+ '5 Waves' Speaks Volumes - 6th Oct 21
Budgies Flying Ability 10 Weeks After wings Clipped, Flight Feathers Cut Grow Back - 6th Oct 21
Why Silver Price Could Crash by 20%! - 5th Oct 21
Will China's Crackdown Send Bitcoin's Price Tumbling? - 5th Oct 21
Natural Gas News: Europe Lacks Supply, So It Turns to Asia - 5th Oct 21
Stock Market Correction: One More Spark to Light the Fire? - 5th Oct 21
Fractal Design Meshify S2, Best PC Case Review, Build Quality, Airflow etc. - 5th Oct 21
Chasing Value with Five More Biotech Stocks for the Long-run - 4th Oct 21
Gold’s Century - While stocks dominated headlines, gold quietly performed - 4th Oct 21
NASDAQ Stock Market Head-n-Shoulders Warns Of Market Weakness – Critical Topping Pattern - 4th Oct 21
US Dollar on plan, attended by the Gold/Silver ratio - 4th Oct 21
Aptorum Group - APM - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 3rd Oct 21
US Close to Hitting the Debt Ceiling: Gold Doesn’t Care - 3rd Oct 21
Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
Original Oculus VR HeadSet Rift Dev Kit v1 Before Facebook Bought Oculus - 3rd Oct 21
Microsoft Stock Valuation 2021 vs 2000 Bubble - Buy Sell or Hold Invest Analysis - 1st Oct 21
How to profit off the Acquisition spree in Fintech Stocks - 1st Oct 21
�� Halloween 2021 TESCO Shopping Before the Next Big Panic Buying! �� - 1st Oct 2
The Guide to Building a Design Portfolio Online - 1st Oct 21
BioDelivery Sciences International - BDSI - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 30th Sep 21
America’s Revolving-Door Politics Behind the Fall of US-Sino Ties - 30th Sep 21
Dovish to Hawkish Fed: Sounds Bearish for Gold - 30th Sep 21
Stock Market Gauntlet to the Fed - 30th Sep 21
Should you include ESG investments in your portfolio? - 30th Sep 21
Takeda - TAK - High RIsk Biotech Stocks Buy, Sell, Hold Investing Analysis for the Long-run - 29th Sep 21
Stock Market Wishing Away Inflation - 29th Sep 21
Why Workers Are NOT Returning to Work as Lockdown's End - Wage Slaves Rebellion - 29th Sep 21
UK Fuel PANIC! Fighting at the Petrol Pumps! As Lemmings Create a New Crisis - 29th Sep 21
Gold Could See Tapering as Soon as November! - 29th Sep 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Why Lower Crude Oil Prices Could Drive Gold Higher

Commodities / Crude Oil Mar 17, 2015 - 01:46 PM GMT

By: Bob_Kirtley

Commodities

We view gold as monetary asset; therefore our directional views on the yellow metal are primarily a function of our expectations of monetary policy. After being very bullish on gold in the years following the global financial crisis as the Fed pursued highly accommodative monetary policy and quantitative easing, we turned bearish on gold at the end of 2012 as the period of easing monetary policy appeared to be coming to an end. We have maintained our bearish stance as the Fed has moved towards tightening monetary policy, however the recent fall in oil prices has caused us to question our view, and whilst we remain bearish over the longer term, we now think that gold prices could bounce from current levels.


Lower Oil Would Harm The Economy

Whilst minor declines in energy costs can be a positive for the economy, the drop in oil prices has been so dramatic that it arguably hampers economic growth. This is due to the ripple effects of a slowdown in the oil sector, seeing job cuts not just in the energy industry, but in the related areas of the economy.

We potentially have yet to see the full impact of low oil prices on the US economy and if oil falls further the damage accelerates. A drop of 20% from here would be more damaging than the last 20% fall as more oil production projects would become unviable. If this impact begins to shift the momentum of the US economy, the Fed could delay its tightening and this move to a more accommodative stance would be bullish for gold.

Disinflationary Impact

Potential economic damage of very low oil prices aside, the larger risk is the disinflationary impact of falling energy costs. The decline in oil prices saw interest rates fall as the market was concerned that lower oil prices would see less inflation, reducing the amount the Fed would need to hike. Once oil bounced, yields moved higher again. However oil prices are now testing recent lows, and therefore we could see bond yields decline and gold prices rise as the market becomes concerned that the disinflationary impact of lower energy costs will see the Fed delay tightening monetary policy.


Transitory

After the GFC when commodity prices were soaring, including oil, the Federal Reserve was under pressure to stop its QE programs and increase interest rates to combat coming inflation from rising prices. However the Fed looked through rising food and energy costs, with the key word “transitory” popping up again and again in their statements. What the Fed means by this is that they see moves in volatile commodities such as oil as temporary price shocks, and therefore they do not have much weight in their monetary policy decisions.

We believe that it is likely the Fed does this again, and will continue on its plan to normalize interest rates with the view that once energy costs return to a more long run average level, inflation will be a threat so they wish to be ahead of this issue by tightening monetary policy this year. If the Fed moved interest rates based on commodities there would be significant financial instability and it would work against the Fed’s medium term goals by overly focusing on short term factors.

No Inflation Globally

Australia, South Korea, Canada, China, Denmark, India, Indonesia, Israel, Poland, Russia, Sweden, Switzerland, Turkey; What do these countries have in common?

Their central banks have all cut interest rates in 2015.

Missing from that list is of course, Japan, the Eurozone and the United Kingdom, who cannot reduce their rates any further and are still doing quantitative easing. Then there is the USA, with the Fed possibly going to raise interest rates in June.

If there is no inflation globally and the disinflationary pressure is so strong that many countries are cutting interest rates, how can the US be so different to begin to hike a few months time?

The Fed Could Go Alone

Whilst it will be tough to tighten monetary policy when much of the world is easing, the Fed can certainly go it alone. One must remember that over recent years the Fed has eased policy faster and more aggressively than its peers. Europe announced QE programs when the Fed was bringing its own QE3 to an end. The US economic data has been far stronger than European or Japanese data and the US economy is not as leveraged on the price of oil as countries such as Canada.

Therefore the fact that other central banks are cutting will not stop the Fed hiking, but global disinflationary pressures could decrease the extent to which it increases the Fed Funds Rate. The US economy is linked to every other in the world, so if there is a lack of inflation globally this will dampen the inflation outlook in the US.

Conclusion

The precarious price action in oil has created an asymmetric risk profile where a 20% rise in oil prices will maintain the status quo but a 20% drop would trigger the market to reassess the outlook for the US economy and monetary policy. Given that a further decline in oil would see the market question the likelihood of imminent Fed tightening, gold prices are ripe for a bounce off this key support level around $1150.

However over the longer term we are still bearish on gold as the Fed will ultimately consider the drop in oil prices as transitory and focus on tightening policy ahead of the future inflationary pressures that will arise once energy costs return to a more normal level. This will send gold prices down below $1000 and therefore we favour being square at these levels, looking to initiate short positions on the yellow metal on this bounce higher. To find out what trades we are making and how are positioning ourselves in other markets, visit www.skoptionstrading.com to subscribe.

Go gently.

Bob Kirtley

Email:bob@gold-prices.biz

URL: www.silver-prices.net

URL: www.skoptionstrading.com

To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. Winners of the GoldDrivers Stock Picking Competition 200

DISCLAIMER : Gold Prices makes no guarantee or warranty on the accuracy or completeness of the data provided on this site. Nothing contained herein is intended or shall be deemed to be investment advice, implied or otherwise. This website represents our views and nothing more than that. Always consult your registered advisor to assist you with your investments. We accept no liability for any loss arising from the use of the data contained on this website. We may or may not hold a position in these securities at any given time and reserve the right to buy and sell as we think fit.

Bob Kirtley Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in