Oil Prices Soar on OPEC Agreement—What Does It Mean for Gold?



Oil prices soar

Oil prices (USO) soared ~6.0% in the week ended June 22. After its meeting on June 22, OPEC decided to raise its output. However, this increase was lower than what the markets expected. 

While the resulting news reports suggested that OPEC decided to increase the output by 1.0 million barrels per day, OPEC left the final figure out of the statement. The recent OPEC pact is seen as ambiguous.

Brent crude oil (UCO) prices were down ~2.0% early on Monday, June 25, as market participants factored in an increase in output from OPEC. Although the exact impact on oil prices is still unknown, the moderate increase in output isn’t expected to reduce prices much. In fact, the oil market is still expected to be tight, supporting prices.

Oil prices and gold

Higher oil prices have usually been a major component in inflation. Gold (GLD)(IAU), on the other hand, is considered an inflation (TIP) hedge. As a result, higher inflation appears to be beneficial to gold’s inflation-hedge appeal.

The relationship between oil and gold

The relationship between gold and crude oil is more complex. While gold is a safe-haven asset, oil is a risk asset. Gold is impacted by broad market sentiment and inflation expectations. 

Crude oil, on the other hand, derives most of its value from the supply-and-demand equation. Because gold and crude oil are broadly driven by expectations of long-term economic growth, these two assets could show a significant correlation. However, this doesn’t necessarily mean that both assets are impacting each other. This correlation could be the result of other variables that may be common to both of them.

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