Gold comes under pressure as US dollar and oil move into comfort zones
Investors appear eager to get back to pre-pandemic norms and the pulse of the commodity and currency markets quickened in the first two weeks of February as gold came under pressure and crude oil and the US dollar headed for strength.
Supply factors in major oil-producing regions prompted the oil price to trend upwards. To begin with, Saudi Arabia cut back further on oil supplies in addition to Opec’s ongoing supply limitations.
In the US, President Joe Biden’s administration confirmed a ban on new oil and gas leases on public land and cancelled the permit for the Keystone XL pipeline project just after his inauguration. A lower supply implies higher demand and a rise in prices, according to normal economic fundamentals.
But these are not normal times. The question remains whether the drive to cut supplies can go deep enough to support long-term price increases given that the coronavirus pandemic still suppresses oil demand.
Is the recent increase in oil prices a temporary phenomenon of animal spirits that will only fade away once the economic reality of Covid-19 sinks in again?
In some ways, oil bulls had a good reason to hit the buy button after US domestic oil stockpiles fell by 6.6 million barrels in the week ending February 5. On top of that, the US Energy Information Administration forecast a 5.4 million barrels per day year-on-year rise in global consumption of petroleum and liquid fuels to an average of 97.7 million bpd for the full year of 2021.
For this quarter, Brent crude oil prices are expected to average $56 per barrel, the EIA said in its February short-term energy outlook. US oil production has also declined since November and may continue to do so in the months ahead, it said.
On the other hand, the EIA warns that pandemic challenges persist in the form of continued uncertainty and reduced economic activity. Higher Brent prices largely reflected Saudi Arabia’s January 5 announcement that its oil production would be cut by a further 10 million bpd in February and March, the EIA said.
When we look down the line to the second quarter, the EIA expects lower oil prices amid rising worldwide supply, which will slow the pace of global oil inventory draws. Investors may be overlooking these factors in favour of focusing on a temporary rise in prices.
The record highs for gold in 2020 are on the decline as the precious metal comes under pressure from a stronger US dollar. Safe-haven buying was the default position last year, but there are signs that investors are changing their habits as hope rises that the pandemic’s end is in sight.
Gold’s downward trend could reflect a different type of safe-haven buying. A stronger USD is more attractive in terms of Treasury bond yields. It could also reflect a shift towards profit-taking and selling while gold still has high value.
Whatever the underlying reasons, gold prices look set for volatility over the medium term because the US Federal Reserve’s tapering operations may start late this year or in early 2022, depending on how the economy performs. Tapering signals an upswing in the US economy and increasing confidence in the greenback.
The US political scene points to potential for an improved economic performance post the pandemic. The new administration could mean that the US-China trade dispute of 2016-20 is just a bad memory for the global economy. The first signal of this came from Mr Biden on February 11, when he spoke with Chinese President Xi Jinping and offered an open line of communication.
Developments in US foreign policy bear close watching, while there is still some distance left to travel before seeing light at the end of the pandemic tunnel.
Gold prices look set for volatility in the medium term because the US Fed’s tapering operations may start late this year