In order to predict where the price of gold may be headed, many investors and analysts will look at interest rates, the fluctuations of the U.S. dollar, and oil prices.
While gold has an inverse connection to interest rates and moves higher as they move lower, there have been times when gold has still moved higher on higher interest rates. Looking at oil prices can be a determining factor for this reason to see where gold could be headed. This is because high oil prices increase the costs of making and transporting goods. It can also drive consumer prices higher. Investors buy gold to protect against possible inflation.
The long-time crude price is considered to be more reliable when predicting gold prices than spot prices. Longer-dated oil prices had reached their peak in the year 2011 and have been on a sharp decline for years. Incidentally, gold was also declining during the same time. These two have a strong direct relationship and over the long term, gold prices tend to move up and down with crude oil prices.
According to a marketrealist.com report, as crude oil prices rise, inflation also rises and over 60% of the time, gold and crude oil have a direct relationship. So, what explains gold soaring this year while oil has been plummeting? The coronavirus.
“Commodities are witnessing another risk-off day as coronavirus concerns boil up,” said Norbert Ruecker, head of economics at Julius Baer Group Ltd. “The oil market remains concerned about demand” while “the flight to safety pushes gold to new highs.”
In 2020, oil prices have seen their weakest level on record citing an abundant supply with very low demand. The coronavirus pandemic has the nation in lockdown and people staying inside and not driving many places. As demand for oil continued to decrease, oil prices even went negative in April.
“This is off-the-charts wacky,” remarked Stewart Glickman, an energy equity analyst at CFRA Research. “The demand shock was so massive that it’s overwhelmed anything that people could have expected.”
Glickman said that if the lockdown persists, “I’m really not optimistic about the prospects for oil companies or oil prices.”
“North American storage facilities are full and there is no place to put new production, amid the huge drop in gasoline demand that has resulted in prices at the U.S. pump going for less than $1.00 a gallon at some locations,” said Kitco’s senior technical analyst Jim Wyckoff.
Bloomberg Intelligence commodity strategist Mike McGlone told Kitco News in April, “The indication for gold is bullish.” McGlone believes “lower oil has strong companions in bond yields and plunging interest rates, globally. This enhances the value of non-interest bearing gold and is indicative of the room central banks have to keep stimulating, flushing the system with money, which is also bullish for gold.”