26 Jan

Oil Is Playing a Game with Gold

WRITTEN BY Meera Shawn

Oil led risk sentiment

Oil futures rose 9% on Friday, January 22, 216. Oil had plummeted to its 12-year low during the previous week, which pulled down world stock markets and currencies. A sentiment of risk was fueled in the markets with the plummeting price of oil. Risk aversion among investors rightly triggered the haven appeal, which led to a rise in the price of gold.

Gold prices have risen about 5.2% since the beginning of January 2016. Silver has also increased 3.8% due to the same haven appeal.

The graph below shows the long-term price performance of gold and crude oil over the past one month.

Oil Is Playing a Game with Gold

Miners take a steep fall

Although the price of gold has risen since the start of 2016 and the price of oil has fallen, most of the mining companies have fallen. Ideally, rising gold prices and lower oil prices should positively impact these mining companies, as they sell a higher priced gold and incur lower oil costs.

First Majestic Silver (AG), Royal Gold (RGLD), and AuRico Gold (AUQ) have fallen 25.9%, 28.2%, and 13.2%, respectively, on a 30-day trailing basis. The RSI (relative strength index) for these three miners is trading between 30 and 40. A figure close to 30 indicates a possible pullback in prices and relative undervaluation.

These three companies together make up 7.4% of the price fluctuations in the VanEck Vectors Gold Miners ETF (GDX). Mining-based ETFs such as the Sprott Gold Miners ETF (SGDM) and the SPDR Metals and Mining ETF (XME) have fallen 8.9% and 22.3%, respectively, on a 30-day trailing basis.

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