For the first time since July 2015, the price of crude oil –Â Crude Oil Futures - February (CLG7) –Â reached and exceeded $55 per barrel.
At the moment, it is trading at $55.04 per barrel, a 2.46% increase from the previous close or up $1.32 per barrel.
Source: Investing.com
Brent Oil Futures - March (LCOH7) is also uptrending; like the crude oil price, it also reached the highest price since July 2015 when it closed at $58.14 per barrel.
Source: Investing.com
At the moment, Brent is trading at $58.13, which represents a 2.31% increase from the previous close.
As for oil, gold and gold-backed ETFs are also priced in dollars; therefore we would also expect a rise in the price of the precious metal and securities that track the price of gold. But this is not the case this time for two reasons.
First, the increase in the price of crude oil and Brent is due to the OPEC agreement to cut oil output by 1.2 million barrels per day (bpd), effective Jan. 1. The OPEC agreement was signed Nov. 30, 2016.
And second, the dollar is appreciating toward foreign currencies. The U.S. Dollar Index (DXY) was trading at $103.39 Tuesday, up $1.18 or 1.15% since the previous close and gained 3.3% since the beginning of December 2016.
The dollar started to strengthen again after the U.S. Federal Reserve’s decision to increase a key interest rate by a quarter of a point between 0.50% and 0.75%, up from 0.25% to 0.5%, last December.
Increased U.S. interest rates and expectation of three more rate hikes in 2017 are attracting foreign capital through investments in U.S. bonds at the expense of investment in gold and related assets. The increase in the quantity of money in circulation is increasing the value of the dollar.
As a matter of fact, gold for immediate delivery closed at $1,148.65 per troy ounce on the London Bullion Market, a 0.90% decline or down $10.45 per troy ounce from the previous close of Dec. 30. On the last trading day of 2016, the bullion closed at $1,159.10 per troy ounce.
The price of the contracts through which the precious metal is traded is also going down on the Comex. Gold Futures - February (GCG7) are trading at $1,148.65, down $3.05 per ounce of gold or minus 0.26%, from the previous trading day. It is downtrending again after a short recovery in the last week of 2016.
The only factor that can push gold prices up is expectations of inflation since the precious metal is a good hedge against falling purchasing power of the dollar. When crude oil prices rise, the rate at which the general level of prices for goods and services rises as well.
This is currently not perceived by many analysts who, for 2017, already reduced their rating on gold, cutting the price of the precious metal per troy ounce up to 17%. Raymond James and Thompson forecast that gold will trade at $1,250 per troy ounce in 2017 while other analysts forecast a lower price. The latter is the case with Desjardins Capital Markets. The firm cut the price of gold to $1,175 per troy ounce, down from the previous estimate of $1,255 per troy ounce.
If the rise in the price of the oil will not be accompanied by a rise in the inflation rate, the share price of the gold mining companies already negatively affected by reduced margins will not be offset by investment in gold industry.
As uncertainty mounts, it is wise to invest in those gold mining stocks that are characterized for having one of the lowest AISC and which gold reserves are defined at the lowest gold price per ounce in the gold stock industry, which is the case, for example, with Barrick Gold Corp. (ABX, Financial). The world’s largest gold producer expects to sustain an AISC per ounce of gold being between $740 and $775 and can “economically” mine gold at a price per ounce of $1,000.
Disclosure: I have no position in the stock mentioned in this article.
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