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Here Is What Higher Oil Prices Could Mean For Gold - Capital Economics

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Here Is What Higher Oil Prices Could Mean For Gold - Capital Economics

(Kitco News) - Could higher oil prices rub off on gold? Capital Economics thinks so, pointing to an interesting relationship between oil and the yellow metal.

“Historically, oil and non-oil commodity prices show some correlation,” chief commodities economist Caroline Bain said in a report published on Thursday. “But a boost to non-oil commodity prices would require oil prices to remain high.”

Oil prices have been rising since mid-February. Brent crude oil price, for example, jumped 21% since the start of the year.

Most of the rally, however, has been driven by concerns around supply, according to Bain, which is why the correlation between oil and other commodities has not been as visible.

“The big picture is that the non-oil commodity indices and oil typically move in the same direction,” she wrote.

When it comes to gold in particular, investors are more prone to owning the precious metal when they are holding riskier asset such as oil, Bain pointed out, noting that gold is a safe-haven and a traditional hedge against inflation.

“If oil prices rise, this is likely to feed through to higher inflation expectations and could prompt buying of gold (in particular) but also other commodities as a hedge,” Bain said.

But, Bain added that for the correlation to feed through, oil will need to remain at a high level for a long time, which she does not see happening this and next year.

“We forecast that the price of oil will fall back as fears over supply prove unfounded and growth in demand softens. We expect the price of Brent to fall to $55 per barrel by end-2019, down from nearly $80 today,” Bain said.

Capital Economics also acknowledged that aside from temporary rallying oil, gold will still remain under pressure due to Federal Reserve’s tightening cycle. “Our forecast that the Fed will raise interest rates by more than the market anticipates is likely to weigh on the price of gold,” she stated.

Bain’s report comes at a time when gold prices managed to recover above $1,300 an ounce on Thursday after last week’s tumble below the key psychological resistance level for the first time this year.

The yellow metal was boosted by geopolitical uncertainty after U.S. President Donald Trump canceled the much-anticipated historic meeting with North Korean Leader Kim Jong Un.

“Trump's scuttling of the summit with North Korea is not surprising, but it still produces an uptick in geopolitical uncertainty, which is bullish for safe-haven gold and silver,” Kitco’s senior technical analyst Jim Wyckoff said after the announcement.

Spot gold on was last trading at $1,304.60, up 0.04% on the day, while June Comex gold futures were at $1,304.60, up 0.02% on the day.

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 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.