Advertise | Bookmark | Contact Us | E-Mail List |  | Update Page | UraniumSeek.com 

Commentary : Gold Review : Markets : News Wire : Quotes : Silver : Stocks - Main Page 

 GoldSeek.com >> News >> Story  Disclaimer 
 
Latest Headlines

Gold Miners’ Q3’17 Fundamentals
By: Adam Hamilton, CPA

Bonfire of the Absurdities
By: John Mauldin

The Social Security Inflation Lag Calendar - Partial Indexing Part 1
By: Daniel R. Amerman, CFA

Rob From The Middle Class Economics
By: Gary Christenson

GoldSeek Radio Nugget: John Williams and Chris Waltzek
By: radio.GoldSeek.com

The Metals Market Is A Mess And Will Likely Continue To Frustrate You
By: Avi Gilburt

Is New Fed Chief A “Swamp Critter Extraordinaire”?
By: GoldCore

Asian Metals Market Update: November-17-2017
By: Chintan Karnani, Insignia Consultants

Gold Seeker Closing Report: Gold Holds Near Unchanged While Stocks Gain on Tax Vote
By: Chris Mullen, Gold Seeker Report

Comparing Digital Metals
By: Craig Hemke

 
Search

GoldSeek Web

 
Falling oil prices and gold market


 -- Published: Tuesday, 6 January 2015 | Print  | Disqus 

In the last Market Overview we pointed out some signals indicating that recession may be on the U.S. horizon. There is no doubt that a possible outbreak of the crisis would have important implications for the whole global economy, including of course the gold market. Therefore, it is extremely important to analyze gold performance through business cycle.

 

Although gold is generally considered as a safe haven, which behaves in an anti-cyclical way, some analysts argue that yellow metal is rather pro-cyclical gaining during commodity booms fueled by easy money. And others say that the business cycle has limited predictive power for gold price fluctuations. What is the truth? In this edition of Market Overview we try to clarify views about the behavior of gold prices in business cycles and during emerging markets crisis.

 

But first let’s analyze what the recent falling oil prices mean for the U.S. economy and gold market. In the last Market Overview we claimed that we had witnessed the burst of the oil boom. Given the great interest of investors in this subject, it is worth developing our point of view a little. Let’s examine the first chart showing the price of oil over the few last decades. It shows something very interesting.

 

Graph 1: WTI crude oil prices from 1986 to 2014

 

In general, oil prices rise in a boom and fall during the bust (it cannot be seen in this graph, but we can add that the price of oil was very stable until 1971, when the gold standard was finally abandoned; therefore the dramatic instability in this market is a feature of the current fiat paper dollar monetary system). Why does the price of oil decline during recessions (indicated by the rectangles, except the last one)? Undoubtedly, there are many determinants of oil prices, like the performance of the U.S. dollar or supply conditions (U.S. field production of crude oil is up more than 50 percent since late 2010), however there is a very interesting link between central banks’ meddling with the economy and price of oil. In short, expansionary monetary policy induces entrepreneurs to start new businesses and projects, which stimulates demand for all raw materials, including oil. Given the relative inelastic supply, higher demand translates to higher prices. Since rising oil prices indicate expanding economic activity and increased demand, lower oil prices can be a signal that entrepreneurs are contracting their operations and thus demanding less oil.

 

In other words, ultra-low interest rates and quantitative easing programs led to the rise in private investments, often very-energy dependent, stimulating demand for oil. Additionally, some investors were buying oil as a hard asset and a hedge against expansionary monetary policy and possible inflation, so oil prices were pushed sky high. Therefore, the decelerating pace of U.S. money supply expansion reduced investment funds available to entrepreneurs for purchasing resources, including oil, to carry out their plans. Moreover, the end of QE3 and some tightening of U.S. monetary policy, at least compared to Japan and Europe, caused the strengthening of the greenback. The U.S. dollar moves generally inversely with oil, so its recent rally was one of the reasons why the price of crude oil plunged. A concurrent drop in prices of many different commodities (e.g., cotton, gold, soybeans and sugar) shows that the fall in crude oil prices is not merely due to Saudi Arabian strategic decisions or development in U.S. production and that Fed’s monetary policy really counts.

 

Ok, we already know the reasons behind the drop in oil prices, but what are the possible consequences for the economy and gold market? We would like to point out here a few, the most important, things. Undoubtedly, lower oil prices are good news for consumers and many entrepreneurs, especially for energy-intensive manufacturers. On the other side, the collapse in oil prices threatens certain high-cost producers, in particular the shale oil industry. There are many premises that the development of this oil extraction sector was another bubble, driven by high oil prices and cheap credit, available again thanks to expansive Fed’s monetary policy with ultra-low interest rates. That easy money was then used to finance the shale producers’ drilling activities.

 

And why this is so important? First, according to a Bank of America Merrill Lynch Research report roughly 15% of the high yield bond market resides in the energy sector (and another 23% in the banking sector which is also exposed in the energy sector). This means that low oil prices for a sustained period can trigger significant debt default and bankruptcy issues. According to a Deutsche Bank analysis, a drop in WTI to $60 (currently, i.e., December 16, 2014, WTI crude oil is traded at around $55) is likely to push energy companies with riskier credit profiles to a level that would imply a 30% default rate and trigger a broader high-yield bond market default cycle.

 

Second, further U.S. GDP growth is at risk. It is of course difficult to precisely assess the overall impact of lower oil prices on economic growth, however it is worth pointing out that the states driving GDP growth in the USA right now are oil states, such as Texas, Colorado, and North Dakota. This may indicate that much of current U.S. economic growth depends on the oil extraction business (even if oil and gas capex represents about only 1% of US GDP), not to mention the stock market. The energy sector is responsible for a third of S&P500 capex.

 

In the last FOMC’s statement, the Committee said that it can be patient in beginning to normalize the stance of monetary policy and the start of hiking interest rates will depend on the strength of U.S. economic data. Taken all these facts under consideration, it is not difficult to imagine that Fed returns to the QE program to boost GDP or the stock market, which would be positive for the gold market.

 

Thank you.

 

Arkadiusz Sieron

Sunshine Profits‘ Market Overview Editor

 

 


| Digg This Article
 -- Published: Tuesday, 6 January 2015 | E-Mail  | Print  | Source: GoldSeek.com

comments powered by Disqus



 



Increase Text SizeDecrease Text SizeE-mail Link of Current PagePrinter Friendly PageReturn to GoldSeek.com

 news.goldseek.com >> Story

E-mail Page  | Print  | Disclaimer 


© 1995 - 2017



GoldSeek.com Supports Kiva.org

© GoldSeek.com, Gold Seek LLC

The content on this site is protected by U.S. and international copyright laws and is the property of GoldSeek.com and/or the providers of the content under license. By "content" we mean any information, mode of expression, or other materials and services found on GoldSeek.com. This includes editorials, news, our writings, graphics, and any and all other features found on the site. Please contact us for any further information.

Live GoldSeek Visitor Map | Disclaimer

The views contained here may not represent the views of GoldSeek.com, its affiliates or advertisers. GoldSeek.com makes no representation, warranty or guarantee as to the accuracy or completeness of the information (including news, editorials, prices, statistics, analyses and the like) provided through its service. Any copying, reproduction and/or redistribution of any of the documents, data, content or materials contained on or within this website, without the express written consent of GoldSeek.com, is strictly prohibited. In no event shall GoldSeek.com or its affiliates be liable to any person for any decision made or action taken in reliance upon the information provided herein.