Gold prices are continuing the climb higher that began with the outbreak of the latest round of hostilities between Israel and Hamas on Oct. 6. The precious metal’s spot price has gained over $162 in the last two weeks, hitting a high just under $1,978 on Thursday afternoon.
Oil has also gone on a tear since the conflict began, with WTI crude rising from $81 per barrel on the day of the Hamas attacks to over $89 today, and Brent crude going from $83 to $92 at last trade.
Sean Lusk, Co-Director of Commercial Hedging at Walsh Trading, told Kitco News that under these conditions, he expects gold prices to keep rising regardless of what bond yields do, and sees oil providing the yellow metal with an additional boost.
“Once this thing started, we had a big run up in both crude and metals, more so crude than metals,” Walsh said. “But then metals pulled back, and then that hospital bombing, and then people don't want to meet with the President, that just fuels the flames, or the fears in this case, of further instability in the region. Maybe this won't only be centered around Gaza. It could explode in Lebanon, you’ve got Iran threatening people.”
Lusk said these events are boosting gold prices, and when the domestic challenges and risks are taken into account, it doesn't really matter what the bond yields are doing. “This is a major ‘black swan’ entering on the market, on top of another debt ceiling thing coming, but we don't have a speaker of the house,” he said. “So that's factored in on the backend, a circus geopolitically and in Washington, DC that shows no signs of ending.”
He said that it’s also possible gold is getting a little too much love right now, but the futures contracts suggest price gains into next year. “We've seen previous rallies near $2000 or just above it, with no follow-through,” he said. “But you look at the contango in the market, it's pretty strong. Whereas Dec is at 1962, [the following futures contracts] are at a 20-spread per month, Dec, Feb, April, and June. So the projection is that we trade higher as we move forward.”
Lusk added that seasonal factors are also out the window in the current environment, and while things like wedding season, Diwali, and Valentine’s Day could give gold a short-term push, they’re now taking a backseat to macroeconomic trends and geopolitical events.
He said the U.S. picture also continues to deteriorate where it counts. Lusk pointed to the latest CPI and PPI reports from last week, and the retail sales figures from Wednesday, all of which show that inflation is coming back. “With the world events and the situation in DC out of control, the S&P has a really good chance to move down towards that 4, 000 marker, and the Dow down maybe to 32,000 or 31,000,” he said. “You’ve got gasoline and energy prices headed up, you have credit cards that are getting maxed out. Consumer savings are pretty much used up. While the job market's hanging in there fairly well, you’ve got strikes all over the place led by the United Auto Workers, and you’ve got wages probably rising more than they should due to these strikes. It's all inflationary.”
“So with those factors, if that's not a perfect storm for precious metals or safer havens, I'm not sure what is anymore,” he said. “We saw the run last week up to 1946, market backed off, down 25 bucks, then made new highs. So in that vein, this is bullish. It's going to be close to $2100, that's where I can see this going. If you draw a line from the three monthly highs since the pandemic, $2063, then it continues, then $2078, then $2085. If you draw a line, that's probably where it goes, just above it. That's where I'm targeting this thing to go, should the saga remain the same here.”
Lusk said the relationship between oil and gold right now will also help to support the precious metal. “It's inflationary, it's going to lift all boats,” he said. “Even though production is kicking up here, the industry itself has constraints coming out of the pandemic. Prices were going to rise because demand was going to come up, that's a surprise to nobody, but how far up? Oil, at this point, can explode up to $120, $130 easy, if Iran gets in the fray or if Israel decides to attack them. Now, will they? Probably not. They seem to have their hands full with this, but I could totally see it on the back end.”
In this environment, he said that if a further correction occurs in the stock market, oil will have a hard time despite the geopolitical worries. “If we have a strong sell-off in equities then all bets are off,” he said. “I think metals probably outperform because they're going to be less of a loss leader.
Lusk said that gold is in a good position to ride the near-term wave of rising oil prices along with the safe haven bid. “They've run together before, and it's not uncommon,” he said. “But if oil collapses, the reason oil collapses Is because inflation is not under control, and now economic activity is tanking.”
Source Kitco
BDST: 1604 HRS, OCT 20, 2023
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