Stock Screening

Wednesday, December 24, 2014

Gold Price is still unknown due to oil stagnant

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Gold, the ultimate inflation hedge, isn’t much use to investors these days. Gold futures fell the most in more than two weeks as a slump in oil cut the appeal of the metal as an inflation hedge. Volatility in the metal rose to the highest since January.

Oil is in a bear-market freefall that began in June, spearheading the longest commodity slump in at least a generation. The collapse means that instead of the surge in consumer prices that gold buyers have been expecting for much of the past decade, the U.S. is “dis-inflating,” according to Bill Gross, who used to run the world’s biggest bond fund. “The tumble in oil prices is detrimental to gold’s health,” David Meger, the director of metal trading at Vision Financial Markets in Chicago, said in a telephone interview. “Of course, the dollar and expectations of strong GDP continue to weigh on gold.”

“The general theme now seems to be one of a rising dollar and buoyant equity markets, leaving commodities vulnerable as an asset class. Short-term, we would keep an eye on North-Korean developments, as they could stir the markets if the retaliation intensifies,” INTL FCStone’s Ed Meir said.

In the wider-markets, the dollar rose 0.31 percent to 1.2192 against the euro, while Germany’s DAX and France’s CAC-40 were up 0.46 percent and 1.13 percent respectively. Meanwhile, US stocks climbed for a fourth straight session yesterday on Monday – the S&P 500 index closed at record high of 2078.54.

Brent crude oil is stagnant at around $60 per barrel after a warning from the Saudi oil minister that OPEC will not cut production from 30 million barrels per day even if oil falls to $20 a barrel and that the world may never see $100 a barrel again. OPEC may fear that a cut in Gulf production would invite competitors such as Russia to compete for its market share.

“The ability and apparent willingness of OPEC, and more specifically Saudi Arabia and the Gulf States, to hold production in the face of plunging prices may also mean the upside for gold prices is limited,” Steel added. “The threat of even lower oil prices is a clear negative for gold.”

Still, the general theme has been one of investors seeking riskier assets while the dollar remains strong at 1.2230 against the euro, US bond yields are picking up and equity markets flourish. “Positioning still seems to be light in gold so we expected the market to remain contained during the holiday period, but big swings in other markets such as USD and crude will exacerbate moves due to the light liquidity,” MKS’ Alex Thorndike said in a note.

"Gold just has so much going against it," the Wall Street Journal quotes strategist Ira Epstein at futures clearing merchants the Linn Group.

"It is not an asset people should buy right now."

"Gold as an inflation hedge is unnecessary," Bloomberg quotes chief investment officer Atul Lele at the $5-billion Deltec International Group.

Some analysts forecast a global gold market deficit by 2016 and that the gold price will be supported by “declining mine supply (2016 is four years after peak capex in 2012), as well as continued global bar hoarding and jewelry demand.”

The big question is whether inflationary pressures start to pick up. The recent plunge in oil prices has led many economists to reduce their estimates for inflation rates in 2015, as energy costs work their way into the prices of most consumer goods. Less wealth from energy-asset owners could weigh on their ability to spend and put upward pressure on prices, especially of luxury items. If inflation remains low even as unemployment falls further, then it would be the worst of all worlds for the gold market.

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