Over the weekend, the 60-day truce between the United States and Iran came to an end, and no replacement for this Memorandum of Understanding has been put in place. Not a single oil tanker transited through the Strait of Hormuz on Sunday, and crude prices immediately rose to $89 a barrel. However, the price of gold hardly moved, with the precious metal trading around $4,400.
Tensions in the Strait of Hormuz and rising oil prices have in the past caused the price of gold to decline because prospects of interest rate hikes increased due to concerns about energy-driven inflation.
This time round, the latest rise in oil prices hasn’t triggered a retreat in gold prices. Why? Several factors help to explain the shifting mechanisms of the gold market.
First, a number of weak economic data reports have watered down the case for a rate increase by the Fed. For example, the Consumer Sentiment Index published every month by the University of Michigan indicated that in July, sentiment fell to 51. This means that consumers are growing more pessimistic about the health of the economy, and this could translate into a reduced desire to spend.
As a matter of fact, retail sales slipped by 0.6% in July, providing proof of the dropping consumer sentiment. If retail sales decline, concerns about a possible recession grow, and that almost erases any chance that the Fed will increase lending rates since such a move could drive the economy into a full-blown recession.
Goldman Sachs released a note going as far as to state that the chances of the Fed hiking lending rates during their meeting in September have dwindled to almost nothing.
When chances of a rate hike drop to such an extent, a major headwind that had limited the chances of gold prices climbing evaporates and the ceiling for how high the metal’s price could climb goes higher.
To strengthen the case against rate hikes, CPI data for July indicated that inflation had inched upwards by a mere 0.1%. That is negligible and chances are high that interest rates will stay the same when the FOMC votes in September.
Further support for gold prices comes from data on central bank accumulation. In Q2, these institutions bought nearly 289 tons of gold. This was a 62% increase from the same quarter last year, and central banks are continuing to buy the metal. This structural demand force bodes well for gold prices because demand is increasing while supply is remaining fairly fixed.
Overall, gold prices are freeing themselves from the oil surge shackles that held them back and the market seems to be positioned for an upswing as soon as a notable catalyst materializes. However, as producers of gold like Platinum Group Metals Ltd. (NYSE American: PLG) (TSX: PTM) know from extensive experience in the market, nothing is guaranteed in terms of timing and magnitude of price changes. Investors should therefore study the situation closely and avoid taking on too much risk in any position they take.
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