Gold and Oil: Adapting to a Fast-Changing Market

But why would OPEC be interested in increasing production volumes again? The simple answer is that, as it maintained its course, the US quietly emerged and obtained greater market share. According to Saudi Arabia, one of the founding members of OPEC, they have enough alternative funding to withstand lower oil prices. Thus, in order not to fall behind, OPEC is planning to increase supply, which will lead to an oversupply in the market and push prices further down.

On a national level, countries importing oil will benefit more than exporting countries. With advancements in oil extraction technology, the US became a net exporter of oil as of 2023, making it vulnerable to a reduction in prices. However, for OPEC, oil is by far the most important income stream, with Saudi Arabia being the largest oil exporter in the world. Historically, OPEC has more to lose by engaging in a full-scale price war with the West. However, this doesn't rule out the possibility that they might increase production volumes to test the market's reaction. Moreover, Iran, an OPEC member, launched a missile strike on Israel, which has heightened tensions in the Middle East and raised fears of an escalation of the conflict. In the context of the oil market, an escalation could result in supply disruptions, which caused a surge in oil prices following the attack.
On the demand side, China is the world’s major oil importer, and its recent economic struggles have raised concerns about future demand for oil. However, China recently released a stimulus package to get the economy back on track. Given the positive response from the market, with Chinese stocks having their best week since the 2008 stimulus package, the market seems optimistic that the world’s largest oil importer will continue to maintain high economic activity. Consequently, oil prices have remained fairly stable despite fears of oversupply by OPEC, as demand expectations have increased. The future of oil prices remains uncertain, making it crucial to monitor OPEC's production levels, the longevity of the PBoC's stimulus package, and escalating geopolitical tensions to gain insight into the market's direction.

Gold continues to have a strong year, reaching new highs in September, trading above both the 50- and 200-day moving averages. Demand is a key driver of the recent surge, as a weakening dollar, interest rate cuts, and inflation concerns contribute to increased demand. It is important to note that gold is a dollar-denominated asset, meaning that a decrease in the dollar makes gold more affordable. The outlook for the USD is uncertain, as investors are cautious about trading the dollar before the outcome of the upcoming presidential election is known. However, some critics argue that it is irrelevant who eventually becomes the 60th president of the US, as the budget deficit remains too profound for a single presidential term to cure.

Moreover, even though the evidence is not conclusive, it is believed that historically an inverse relationship between gold and interest rates exists, which could be observed during the recent interest rate cuts by both the Fed and the PBoC. However, recent interest rate hikes have not stopped gold from performing well, which highlights that the relationship is far from absolute. During 2022’s interest rate hikes, gold remained stable, as other competing forces, such as geopolitical tensions and inflation, created demand for gold as a hedge. It becomes clear that the factors driving gold prices result from the combined influence of various market forces, rather than being dictated by a single, isolated factor. For the future of gold prices, heightened geopolitical tensions, interest rate cuts, and a USD that investors are steering away from as we approach the 60th presidential election provide opportunities for both short- and long-term investors.