Further production cuts from Saudi Arabia and Russia are providing some momentum for oil prices, which in turn, is supporting the gold market; however, oil prices will have to go much higher before inflation fears provide new momentum for the precious metal, according to some market analysts.
West Texas Intermediate (WTI) crude oil prices are seeing solid gains of 3% Wednesday after Saudi Arabia said it would cut its production by another 1 million barrels per day, followed by Russia, saying it would cut its production by 500,000 barrels per day. August WTI last traded at $72.01 per barrel.
At the same time, gold prices continue to flirt with initial resistance around $1,930 an ounce after bouncing off support last week at $1,900. August gold futures last traded at $1,931.20 an ounce, relatively unchanged on the day.
While higher oil prices do provide some support for gold, some analysts have said that the 3% move is still not enough to drive inflationary threats, which are needed to support gold prices.
ActivTrades senior analyst Ricardo Evangelista said that he doesn’t see oil prices moving much further as the world continues to face recession threats, impacting oil demand.
“Oil prices bounced back after the announcement of further cuts from Saudi Arabia and Russia, but it rests to be seen if the gains will be sustainable,” he said. “I don’t think they will. The deterioration of the economic outlook in China and elsewhere, as well as the continued hawkishness from the Fed and the ECB, are likely to cap the upside for the price of the barrel as demand expectations continue to drop.”
Ole Hansen, head of commodity strategy at Saxo Bank, said that gold remains strongly negatively correlated with bond yields. The yield on 10-year bonds is trading at a 4-month high at 3.9%.
“Gold‘s correlation to real yields has been reestablished during the past month, and if maintained, it should support gold if higher oil prices lead to speculation about sticky inflation,” he said.
However, Hansen added that he doesn’t see oil breaking out of its two-month trading channel anytime soon.
Alex Kuptsikevich, senior market analyst at FxPro, said that he doesn’t see the latest production cuts providing much support for oil.
“So far, efforts by Russia and Saudi Arabia to support prices by cutting production have been enough to prevent an uncontrolled decline, with prices falling away from their long-term (200-week average) trend levels. At the same time, oil prices are a quarter lower than a year ago, creating disinflationary pressures,” he said.
With bond yields rising due to the Federal Reserve’s aggressive monetary policy stance, Kuptsikevich added that gold faces some problematic headwinds. However, he also noted that this environment also provides opportunities for gold.
“Interest rate hikes (with two more expected) are increasing the potential for problems in the banking and consumer sectors,” he said. “Signs of trouble for large and medium-sized banks during the quarterly earnings season, which begins in late July, could quickly reverse gold’s fortunes, as happened in March.”
