Retreating Oil Prices Could Have Spilled Over Gold



Gold and oil

Gold’s fall during the Monday trade could have been the result of retreating oil prices. Crude oil prices slipped about 3.8% on Monday, December 28. The fall also led gold to plunge 0.71%, with gold losing $7.6 per ounce and closing at $1,068.3 per ounce. The excess supply in the crude oil market is likely a reason for the fall.

Gold is positively correlated to oil and is used as a hedge against oil-led inflation. Lower oil prices signify a deflation environment. Such an environment is harmful to the United States as the Fed is all set to tighten the belt further in 2016. Deflationary concerns can also result in a delayed liftoff. That can give some breathing room to precious metals.

Article continues below advertisement

Funds and gold

According to the latest data compiled by Bloomberg, assets in the SPDR Gold Trust (GLD), the world’s most famous gold exchange traded fund, are near a seven-year low. This most likely reflects a bearish investor sentiment. Holdings in the fund touched a six-year low of 1,458.19 metric tons on December 17. Further, the assets fell to 1,470.3 tons on December 23. GLD fell almost 10% in 2015, and the leveraged mining-based ETF, Direxion Daily Gold Miners (NUGT), fell a whopping 77.6% so far.

The bearish sentiment in the market for precious metals has given anemic growth to the mining sector as well. Companies like Yamana Gold (AUY), Eldorado Gold (EGO), and IamGold (IAG) fell 51.2%, 48.6%, and 40.2%, respectively. However, the fall in oil prices is beneficial for the mining companies as it results in lower exploration costs. The companies mentioned above together contribute almost 9% to the price changes in the VanEck Vectors Gold Miners ETF (GDX).


More From Market Realist