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Capital Economics: Weaker Oil Prices Should Help Gold And Copper

By Kitco News
Wednesday December 17, 2014 1:26 PM

(Kitco News) - Commodity analysts at Capital Economics are bucking the trend and arguing against conventional wisdom that says lower oil prices are negative for commodities in general.

In a research note published Wednesday, Julian Jessop, head of commodities research at the firm, said that while declining oil prices may lead to lower energy prices in general, there is potential for copper and gold to benefit from weaker crude.

Jessop noted that the two main arguments for lower commodities on the back of dropping oil prices are that U.S. dollar strength is a common denominator that drives all commodities lower. The second argument for weaker commodities, especially gold, is that lower oil prices are deflationary.

However, Jessop added that the dynamics are set to change.

“Crucially, the slump in oil prices is largely due to supply-side developments specific to the oil industry, rather than indicative of generalised weakness in demand,” he said in the report. “Most countries – and the world as a whole – should be better off as a result of lower oil prices, including China and India.

Jessop said that cheaper oil prices should cause global economic activity to rise, which would put more demand pressure on industrial metals.

At the same time, while inflation is expected to weaken, interest rates and global monetary policies will remain looser for a longer period of time.

“We therefore continue to expect the price of copper to recover to at least $7,200 per tonne by end-2015 (from around $6,375 today), and gold to $1,300 per ounce (from $1,198), helped rather than hindered by the lower oil price,” he said.

Crude oil prices have been declining since early June when prices were hovering above $100 a barrel. However, on Tuesday West Texas Intermediate crude oil prices hit their lowest level since early May 2009. Currently prices are still hovering below $60 a barrel; as of 1:11 WTI January crude was trading at $57.94 a barrel.

Looking at the gold market, Comex February gold is hovering around $1,194 an ounce, just below the key psychological area of $1,200 an ounce.

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By Neils Christensen of Kitco News; nchristensen@kitco.com



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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