Oil, gold part ways during rocky year
Commodities that traditionally work in tandem should continue to drift apart in 2015, experts say
Although bullion has had a rather lacklustre year, the gold bugs are actually breathing a sigh of relief as they wave goodbye to 2014. It could have been far worse. Historically, gold and oil prices have moved in tandem. But the duo veered apart in 2014, with oil sliding more than 40 per cent and gold — which climbed to nearly $1,400 (U.S.) an ounce last March — ending the year roughly where it began, in the $1,200 range.
“Gold and oil had a correlation, but it fell apart this year,” says mining industry analyst Barry Allan of Mackie Research Capital.
“The relationship is really more about the U.S. dollar. The falling oil price stimulates the economy, up goes the U.S. dollar and down goes gold,” he said.
Gold didn’t actually go into free fall like its crude counterpart. Nor is it gaining momentum, much to the chagrin of the big producers who scooped up numerous assets in boom times, betting the price would be flying high today. In fact, it’s rounding out the year fairly flat, despite lofty predictions only a few years back that bullion would be worth close to $2,000 an ounce by now.
The slump has forced many mining companies to drastically pare costs, close mines and shelve major projects as they wait for gold’s value to perk up again.
“Gold’s in a down cycle, and it’s competing against a strong U.S. dollar that is higher against every major world currency,” notes Ian Ball, president of Abitibi Royalties Inc.
“It’s also losing investor interest due to lower oil prices, and the expectation we could see lower inflation. I expect both themes to continue into 2015, along with the potential for U.S. rate hikes,” he says.
“However, the world is an uncertain place right now and the price of gold could raise a few eyebrows over the next 12 months,” added Ball, referring to its status as a safe haven in times of global turmoil.
But higher interest rates usually scare investors away from gold, whose fundamentals are different from industrial metals such as nickel and copper because of its historical significance as a form of currency and now as an investment vehicle.
The metal doesn’t earn interest or produce dividends, so its price tends to drop when interest rate increases make other investments more attractive.
Commodities are under pressure from many angles. Collapsing oil prices are driving bearish sentiment, as energy is used to produce or deliver almost everything, analysts explain. Low inflation and higher interest rates create an “ugly scenario” for gold, says Bank of America Corp.
“The dollar has been the main binding force between gold and oil, and now the slowdown in Europe and in the emerging world has helped the two reconnect,” Walter (Bucky) Hellwig, who helps manage $17 billion at BB&T Wealth Management in Birmingham, Ala., tells Bloomberg.
“Both these investments have lost their lustre, and we will probably see them continue to trade weak as money continues to flow into U.S. equities and the dollar,” he says.
Reduced pressure on consumer prices is also eroding the appeal of gold as an inflation hedge. Holdings in exchangetraded products backed by the metal fell 8.8 per cent this year. But it’s not all bad for gold. “I can remember back when $375 or $400 was a great price for gold,” says Allan, referring to the early 2000s, when bullion began its meteoric rise.
“Now it’s the end of the world because it’s $1,200,” he says with a laugh. “It’s hard to say it’s all doom and gloom. We’re in the hangover from the heady days of 2007, when all the big mining companies were buying each other up and they were leveraging their balance sheets (believing) bigger is better,” Allan says.