Crude oil has gone through a slump. What does that mean for the price of gold? Brent crude oil sank from $79 last month to $56 per barrel. Forecasts for oil demand showed a reduction in supply. The IMF cut their forecasts for the global GDP. The other player is the US economic growth, which started up strong, but is expected to dwindle because of tax cuts, the increasing debt trade tariffs US politics and the unpredictability of Donald Trump. The weak demand could be responsible for about 85% of the decline in the supply of Brent crude oil. The plunge in Brent Crude oil was in part caught by the increased amount of oils supplied by Saudi Arabia. Despite sanction on Iranian Oil shipments, America was getting a significant amount of Brent crude oil from other countries. The drop in oil prices comes along with a sell-off of other valuable equities in developed countries. If oil and risk assets sink together, then that may be an indication that we are heading for recession. That’s how it should work, but history isn’t consistent.

Oil rose when the 1980 recession hit. It barely moved between 1981 and 1982.

Oil prices fell in the 1990 and then jumped to 10 year highs in the middle of the first gulf war. They fell once more during the 2001 recession.

During the 2008 financial crisis, oil prices rose to record highs and peaked another 65% just before the Lehman Brothers: debacle.

So could we blame the recession for oil hitting multi-year highs in 2018 like we did in 1980 and 2018 and what does a recession and oil prices have to do with the price of gold?

When people fear economic strife, gold investments rise. Gold jewellery sales may suffer during a recession and less people will buy into gold coin collection as a hobby. However, there is no correlation between gold and GDP growth. The last five economic downturns in the US prove that. In the 1980 recession, gold prices fell and rallied between 1981 and 1982. They rose and fell between the 1990 and 1991 recession and remained pretty much unchanged for a while, then in 2001 they edged 5% high. During the 2008 crash the price of gold rose by 15%.

Oil has been dropping quite fast in 2018. What is even odder is the high price of natural gas, a fossil fuel you would think should signal some underlying economic shift.

Some analysts believe that there is a gigantic fund that went long on crude oil and short on natural gas and is now frantically trying to get out of the situation. This dash for an exit created a landslide fall in oil and a spike in natural gas.

Again, what does that have to do with gold?

Well, if oil isn’t doing so well and most of the big risk assets aren’t going high as well then big hedge funds and speculators move their bets to gold. Even though gold has not come close to the magnificent peak it reached in 2011, it has a number of hedge funds betting on gold gearing themselves for an all-time high.

So, how will gold prices react if the GDP growth becomes negative?

A negative GDP may matter less than those hedge funds betting on the price of gold to fall in a rush to exit out of crude oil commitments. All they are doing by being bearish is driving gold futures high and driving the price of physical gold higher.

Source:

1. https://www.marketwatch.com/story/stock-market-investors-wrestle-with-a-glut-of-bearish-signs-as-oil-prices-plunge-2018-11-10
2. https://m.economictimes.com/wealth/invest/factors-that-affect-gold-price/articleshow/64464960.cms