12 Feb

Gold connected to crude oil prices

WRITTEN BY Anuradha Garg

Crude rises on rig count decline

West Texas intermediate, or WTI, crude oil gained ~22% from its January 29, 2015, low of $43.85 per barrel. This is the largest percentage gain for WTI crude oil since January 2009. WTI crude oil rallied due to short covering. The short covering was fueled by a record decline in the weekly US rig count.

Gold connected to crude oil prices

Rig counts indicate active drilling activity. The US rig count was down ~24% from its October 2014 peak. The rig count was at 1,223 as of the week ending January 30, 2015.

Prices have increased recently, however. They hit five-and-a-half-year lows with the supply glut situation. OPEC’s (Organization of Petroleum Exporting Countries) decision not to cut crude oil output in face of falling prices sent the prices spiraling down last year.

Oil and gold

Cheaper oil means lower inflation. This means gold should be negatively affected since it’s usually considered a hedge against inflation. Also, decreasing oil prices are positive for US spending on other items. Spending accounts for two-thirds of the US economy. Better economic prospects and lower inflation are positive for equities and negative for assets such as gold that don’t offer any income.

Though crude oil prices have risen lately, it’s more likely we’re seeing a corrective phase. Prices haven’t risen enough yet to put pressure on inflation, which would have been positive for gold prices (GLD). The price of gold affects companies such as Goldcorp (GG), Barrick Gold (ABX), Newmont Mining (NEM), and Yamana Gold (AUY). ETFs that invest in these stocks, including the VanEck Vectors Gold Miners ETF (GDX), are also likely to be affected by crude oil price movement. GDX’s top holding is Goldcorp, which makes up 10.7% of its portfolio.

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