Analysts See Higher Gold Prices As Correlation With Oil Breaks Down In Risk-Off Environment
Gold is marching to the beat of a different drum, defying weaker oil markets and gaining renewed support as a safe-haven asset, according to analysts. Analysts are also expecting that the yellow metal could continue to go higher as oil falls lower.
West Texas Intermediate crude oil has dropped almost 15% since the start of the year and, according to analysts, there is no indication that the rout will abate any time soon. While WTI crude has dropped, gold has been a strong performer; Comex February gold futures are up more than 4% since the start of the year, and are near a three-month high.
As of 11:36 a.m. EST, February gold was trading at $1,239.20 an ounce, up $6.40 or 0.52% on the day; February WTI was trading at $45.78 a barrel, down 29 cents or 0.63% on the day.
Historically gold and oil have had a relatively close correlation; analysts have pointed out that rising oil prices are inflationary and gold is seen as an inflation hedge. Lower oil prices are deflationary, which can be negative for gold.
However, analysts now explain that gold is no long reacting to oil’s inflation expectations and are instead acting as a safe-haven asset as weaker oil prices have resulted in higher volatility in equity markets.
“Oil’s impact on gold could have jumped either way… but the market has decided that the falling oil prices are positive for gold because of the potential destabilization of the economy and the prospects of extended ultra-loose monetary policy,” said Julian Jessop, head of commodity research at Capital Economics.
Jessop said that gold’s rally since the start of the year is a strong indication of its appeal as a safe haven investment. He added that gold is also appealing to investors because after its significant fall in 2013, it has managed to stabilize, holding support around the $1,200-an-ounce level.
Jessop added that they are reiterating their call for gold prices to hit $1,300 an ounce this year and $1,400 in 2016.
As to how high gold prices could go in the short-term, on the back of weaker oil prices, analysts at TD Securities said that gold could end up trending to the late-October highs of $1,255 an ounce.
“It seems that gold is now the risk-off asset choice for those who worry about the global economy, disinflation and possible emerging market corporate solvency problems,” they said in a report published Monday.
TD Securities also explains that 10-year Treasury bond yields, which is considered another safe-haven investment, remains below 2%, helping to increase gold’s appeal as low interest rates reduce the yellow metal’s opportunity costs.
Analysts from HSBC are also relatively bullish on gold prices in the near-term as oil prices remain weak.
“If oil declines to the point where the economies of oil-exporting nations weaken rapidly, investors may increase gold purchases,” they said in a report.
Although gold prices are holding on to strong gains, Jessop added that investors should still use some caution. “The recent recovery is small in the context of the much bigger declines since 2011,” he said.
It would only take oil prices to stabilize for investors dump their gold investments and jump back into higher risk and higher yielding asset-like equities. |
