The focus of this article is the connection between gold and oil prices. Our goal is to analyze and forecast the price movements of these commodities.
Investors believe that changes in the gold price can have an impact on the worldwide economy. In general, gold prices reflect changes in the value of the US dollar compared to other currencies.
When the dollar is strong, gold will be less expensive in foreign countries, therefore it tends to cut demand and put pressure on gold prices, pushing them down in dollar terms. The opposite is also true. When the US dollar weakens, it makes gold more attractive to purchase. In that way, there is a higher demand, which pushes gold prices upward.
This first part of this article is devoted to gold price in 2018. According to the historical gold chart, it is possible to visualize that price continues its downtrend in 2018. Let’s analyze the chart below.
According to the chart, gold prices were below $1350 in April, when the downtrend began. Another important price point to consider is $1185 (the bottom of the trend). This support level appeared in August, and since then gold has been moving inside the price channel either near resistance level or near support one.
Since gold has a reputation of a safe haven investment, during economic booms investors choose riskier stock with higher returns. The United States’ GDP came out at 3.5%, while American unemployment rate was at the lowest level since 2001.
Given the optimism about the US economy, it is reasonable that investors leave safe investments in precious metals and shift towards better-performing financial instruments, illustrating the negative correlation between gold and the American currency.
In the second part of the article, we will focus on the oil prices during 2018. In September, global oil prices hit a four-year high after OPEC promised to keep production steady. Investors believed that the US sanctions against Iran and power cuts in Venezuela would lead to supply shortages.
However, US oil production increased, and oil prices entered a bearish market. It means that prices have been volatile thanks to swings in oil supply, because the oil industry has changed in fundamental ways. Mainly, the United States is producing so much oil to avoid the cost of stopping oil rigs.
Besides, Saudi Arabia also did not want to lose market share to American oil producers and felt that lower prices would force the US producers to reduce its competition. Let’s analyze the oil prices chart below.
From the end of September to the end of October, crude oil price was declining at the fastest rate since July 2016. In addition, the Chinese economic growth was lower than expectations and influenced the economic indicators in several countries.
Consequently, it led to market concerns over the oil demand growth. Financial markets also displayed price volatility in October, contributing to sell-offs in risk assets such as equities and commodities.
In 2019, according to the International Energy Agency, the global oil demand growth is basically unchanged, as a weaker economy is mainly offset by lower oil prices. Global oil supplies are still growing rapidly, as record output from Saudi Arabia, Russia and the US more than the production declines from Iran and Venezuela.
In conclusion, among the most important supply-side factors weighing on pricing expectations are the US oil production, the US oil stocks and OPEC oil supply. Oil price forecasts for the next year will depend on the interaction between supply and demand on international markets. If the scenario of the end of 2018 remains the same, in 2019 it will be possible to see the global oil price continue its bearish trend.
Olymp Trade Analytical Department