How does the falling oil price affect gold?
One of the most significant headlines in financial markets over recent months has been the dramatic fall in the oil price to $50 a barrel. But is there a direct relationship with gold and will a sustained low oil price drag down the price of precious metals?
With the FTSE 100 index heavily weighted towards oil, the continued fall in oil prices has pulled the index lower in value too. It’s been a hugely volatile period for equities but not all of this turbulence can be solely credited to plummeting crude prices. European stocks have dropped dramatically due to concerns that Greece’s upcoming election will lead to the Hellenic Republic leaving the Euro and its austerity promises behind. The consequence would be considerable debt write-offs for many institutions and investors and reported Quantitative Easing by the EU in an attempt to prop up the floundering region. Similarly, the recent terror strikes in France, with additional threats globally has put further pressure on the stability of equity markets.
Clearly the gold price has benefited from these falls. As the traditional safe haven investment, many investors have switched into gold to protect against the volatility. However, oil can’t be granted full responsibility for the equity turbulence as markets still struggle with the fallout from the ongoing global financial crisis.
Petrol prices have fallen from £1.27 / litre in November to around £1 / litre now. In theory, this should put more money into consumers’ pockets – driving up the economy and gold down. However, the fall in the pump price doesn’t get close to reflecting the fall in the oil price as so much of the petrol price consists of tax. This effect has diluted oil’s impact. With other factors still holding the economy back like low wage increases, lower petrol prices alone aren’t enough to spark an economic surge.
With the oil price tumbling, it isn’t only consumers who could benefit from lower fuel prices, but corporations too. Anything which requires transport could see costs fall while the oil price remains low. It’s just doubtful that companies will choose to pass any savings onto consumers. Gold mines have struggled over the past 18 months with gold’s price falling below the cost of production. With oil making up a substantial element of their fixed costs, many may perceive the low crude price as the saviour they needed. Lower oil prices could well end up keeping some mines in business who may otherwise have shut down – maintaining gold’s supply source. However, with such lean times recently for the gold miners, it is unlikely that low fuel costs will be passed on as lower gold prices as they seek to make up lost revenue during the recent mine squeeze.
Despite oil’s fall, and prediction to continue falling towards $40 a barrel, gold has started the year robustly. While it’s risen strongly in Dollar terms by 5%, its performance in Sterling is even better at 7%. Not bad in a fortnight. This demonstrates that while oil has some degree of impact on the gold price, it is impossible to draw a direct correlation. There are simply too many other factors at work.
Indeed, some of those who may suffer the most by the falling oil prices are the Russians and some Middle Eastern producers. These are the very same investors who have provided the impetus for the UK economy by focusing much of their investment in the UK. Take away the momentum from these guys, and the UK economy may yet be pulled back, sparking another rush towards gold. So while the Ukraine invasion may not have made an immediate impact on your gold investment, it may well be doing now.