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Crude oil prices and gold: What’s the connection?

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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.

Production estimates from US exploration and production companies are showing no signs of a significant slowdown. This coupled with weak demand has led to massive inventory buildup, which is putting downward pressure on crude oil prices.

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Oil and gold

Lower crude oil prices mean lower inflation. This should have a negative effect on gold since gold is usually considered a hedge against inflation.

Decreasing oil prices are also 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.

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