Crude oil prices fell yet again this morning, plunging even further below their recent lows. Both global benchmarks gave up over 3% in early morning trading, which sent Brent crude below $50 for the first time since this price decimation began. Nonetheless, spot gold was up to $1,225 this morning, a 4-week high, which is showing the yellow metal’s resilience in the face of weak oil prices and a robust dollar. Cheaper oil helped European stocks tick higher as the euro fell below $1.18.
Yesterday in the Markets
Friday was a mixed bag, with gold and silver modestly higher while U.S. stocks fell, closing slightly off of a midweek rally. Treasuries retreated and then again saw demand, as many investors are following the old adage, “When in doubt, put your money in the U.S. economy.” For the first time in about 6 years, this axiom rang true in 2014, and many expect it to continue to be the case this year.
Factors Affecting Gold Today
Gold will no doubt be affected by which direction oil prices go: if they continue to fall, it will be bullish for the dollar, which will inherently drag down gold prices. Any reversal in crude oil could thrust gold prices higher. Yet, even as oil continues to drop, the precious metals have shown some surprising strength in the face of deflationary pressures.
The outlook for “black gold” is fairly dismal at the moment. (When an indispensable commodity plummets over 50% in 6 months, you can’t blame people for lacking optimism.) Goldman Sachs is predicting a bottom of about $40.50 per barrel this spring, with crude oil recovering to about $65/bbl during 2016. Simultaneously, the Saudi billionaire Prince Alwaleed bin Talal told USA Today that the world is “never going to see” $100/bbl oil again, reckoning that the previous price levels above $100 per barrel were “artificial.”
The headlines about oil’s continued fall are likely stalling any demand for gold that would stem from the recent corporate bond default of China’s Kaisa Group Holdings; this marks the first occasion that a mainland Chinese company defaulted on a USD-denominated bond. The Shanghai index was down 1.7% this morning on the news. Kaisa also recently missed a loan payment to the Hong Kong-based lender HSBC earlier in the new year, prompting the company to look into restructuring (rather than liquidation). Though this would normally stir safe haven demand for gold, especially from those heavily invested in Chinese companies, this was held down by the inverse price movements between oil and the dollar.
The strong dollar pushed the euro below $1.18, which is helping Eurostocks. If the European Central Bank can’t stoke inflation, their next best bet is to try and devalue the euro, which would help drive purchases of European exports while also acting as its own form of economic stimulus. U.S. shares were all about 0.75% lower this morning, as energy shares are being hammered by low oil prices. Treasuries continued to see robust demand, driving 10-year yields as low as 1.93%.
Tuesday’s big economic news will be the JOLTS (Job Openings and Labor Turnover Survey) report, which showed a somewhat soft labor market in November. A more impressive showing for December could go a long way toward forcing the Fed to raise interest rates sooner. The Treasury budget will also be released, which could show the deficit shrinking further.