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 sign of a slowdown.
Oil and gold
Cheaper oil means lower inflation. This should negatively affect the price of gold because it’s usually considered a hedge against inflation. Decreasing oil prices, however, 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 the price of gold (GLD) and companies such as Goldcorp (GG), Silver Wheaton (SLW), Gold Fields Ltd. (GFI), and New Gold Inc. (NGD). 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 7.5% of its holdings.
Investors should also think of crude oil in terms of an input cost for gold miners. As input costs go down, producers benefit on the operating margin to that extent, other things remaining the same. The extent of benefits vary among producers depending on the usage of crude oil and its derivatives, and also the extent to which they use hedging on oil exposure.