Crude oil prices under pressure
The price of West Texas Intermediate, or WTI crude, the US benchmark, is hovering at around $50 a barrel. It has lost ~53% since June last year due to fears of oversupply and the rising US production of shale gas.
Crude oil prices rose to $53 last week but fell again when production estimates from US exploration and production companies showed no signs of a slowdown. Last week, the EIA (U.S. Energy Information Administration) reported that US commercial crude oil inventories increased by 7.7 million barrels from the previous week—more than the estimates. Unexpectedly, prices settled 1.2% up for the day. But since then, prices have come under pressure on the massive inventory buildup.
Oil and gold
Cheaper oil means lower inflation. This means gold should be negatively affected because 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 that don’t offer any income, such as gold.
As a result, we’re likely to see a negative impact on gold prices (GLD) and companies such as Goldcorp (GG), Barrick Gold (ABX), Newmont Mining (NEM), and Yamana Gold (AUY). ETFs that invest in these stocks, such as the VanEck Vectors Gold Miners ETF (GDX), are also likely to suffer. GDX’s top holding is Goldcorp, which makes up 10.2% of its holdings.