Friday, May 21, 2010

Missing match – Gold and Crude Oil

By Rutam Vora, Commodity Online
The direct correlation between the gold prices and crude oil prices seem to be heading towards a mismatch as the recent global turmoil has lifted up gold prices and weakness in European Union and uncertainties attached with the US economy has marked a dent in crude oil prices, which have tumbled to seven month lows.

Historically, it has been observed that prices of gold and crude oil have reflected similar price movements, with on one hand a rise in crude oil would translate into a rise in gold prices too.

But the phenomenon seems to have broken in recent months especially when the crude prices have hit the lowest levels since September 30, 2009 sinking at $67.9 dollars a barrel on Wednesday, 19 May 2010. The weakness in crude prices was mainly attributed to the stronger dollar and worries over the impact of the Euro Zone crisis on energy demand.

Greek debt crisis worries gripped global economies with uncertainties lingering on the industrial consumption. This caused crude oil demand getting into jitters and prices plunging down by about 20% from the $87.15 per barrel peak in early May, since then the prices have been on a free fall.

Conversely, gold prices have headed north hitting the all-time highs of $1249.30 an ounce in recent trades during May 2010. But looking at the current global situation, gold seems to be the safe haven for not only the individual investors but also global financial institutions including banks and treasuries have heavily started investing in gold, to keep liquidity intact.

Even though the experts in the field believe that oil prices were primarily driven by the currency, some are of the opinion that oil is underperforming mainly due to traders’ perception towards crude oil remaining sluggish in short term.

Secondly, a weaker US currency makes dollar-priced oil weak for holders of weaker currency units. The single European currency has remained weak despite Euro Zone finance ministers putting together a trillion-dollar (750-billion-euro) debt rescue package for the region.

As informed earlier, the bullishness in gold ensures that the yellow metal has maintained its sanctity as an asset class even in the troubled times, while crude oil has more or less remained sensitive to the anticipation of future industrial demand and fuel consumption.

Investors remain worried that austerity measures announced by Greece and other debt-laden Euro Zone countries could hurt growth and consumption in Europe, weighing on energy demand.

This implies that the mismatch that has come to the fore will continue in the current economic situation, which is led by the European economic crisis. Oil producer Libya has already expressed concern about the slump in prices, but said there was no need for an extraordinary meeting of OPEC to discuss the situation or make changes to the cartel's official output target.

Member countries of the Organisation of Petroleum Exporting Countries - which pumps about 40 percent of the world's oil - have publicly expressed a desire for crude prices to stay above 70 dollars a barrel.

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