Only if you had just landed from Mars or been asleep for several months would you not know what had happened to oil prices this year.
Strangely, though, whereas the decision by Opec not to intervene added a decisive twist to the tale, the previous slippage leading to that situation developed relatively unobtrusively.
Despite the prior knowledge of the market, a combination of circumstances created a surprising and intensifying turn of events in the second half of 2014 that caught most rather unawares.
During the first half oil prices had tracked sideways within a channel that suggested everyone was comfortable with the market balance, and the recurrent disruptions to production of crude and moderate recovery of the world economy were conducive to calm conditions.
A comparison or contrast might be made now with gold, which has also been in a somnolent state, at around $1200 per ounce, located thereabouts at both beginning and end of the year.
Might we therefore contemplate a sharp change in its course on the basis of any factors already known about, or is there really nothing like the growing impact of shale on oil trends to upset the apple-cart, bearing in mind that even that addition to the global equation may be viewed as simply part of the market’s natural rhythms, which could partially unwind?
Even without detailed investigation of the many influences to be tapped, we can probably identify the kinds of issues that could breach gold’s present normality, as appeared to occur with oil.
On those grounds, some sense of where breakout risk lies could be deduced, which may not be as important as energy receipts to the Gulf economies, but could well be relevant to investors -- especially those convinced that the world economy remains in a hole, so that only another turbo boost of some sort will satisfy policymakers desperate for economic growth.
That feeling may be reinforced if we agree that those authorities -- particularly the US Federal Reserve and UK’s Bank of England -- are known not to be concerned to stifle inflation in the face of diminishing unemployment, but may even welcome it to some degree (and perhaps take risks with it) to help deflate the burden of sovereign debt. The Japanese government is similarly inclined, and even the European Central Bank seems to be on the cusp of revving its engine, subject to Germany’s control of the handbrake.
In other words, even without digging for clues, there is reason to suppose that gold has significant upside potential, in protecting against inflation.
Equally, however, expectations are that the interest-rate cycle, for so long at rock bottom, as if flat-tyred, is primed to re-emerge, if only ever so gently. Market chatter is alive with the issue of when US and UK rates could be lifted, even as the respective central banks find ever more refinements to their language to muddy that prospect, given their lack of conviction as to whether economic recuperation can withstand any sort of jolt to the system.
With the return of meaningful yield on cash, of course, the appeal of gold is drastically undermined -- in the opportunity cost of parking funds elsewhere and in the risk that others in the market will lean increasingly to the same view, limiting the metal’s prospects. The downside then naturally beckons.
Thus, much hinges on the shape of the economic outlook, and accompanying policy stance, very much the domain of mainstream analysis and regular commentary.
For the moment it would seem the offsetting influences – of economic pick-up and likely counterpart policy tightening – are cancelling each other out in the gold market. Useful pointers can still be found, however, with a reading of historic forces.
Commodity analyst Jeremy Friesen of Morgan Stanley, for instance, explained recently that, examining their track record throughout human history, in the short term gold prices may stray from the price inflation of goods and services, “but the two inevitably re-unite”. In the long term gold is valued in terms of fiat money, i.e. the US dollar, its relative demand, and the underlying growth of money supply.
Gold itself behaves like a currency, in fact, and is therefore notoriously hard to forecast, moving from theme to theme and deviating some distance from fundamentals. Existing supply held in jewellery or investments or official reserves are set against incremental mine production, and the perceptions of all those involved.
As to the situation now, Friesen suggests the recent surge in US money supply places gold currently below fair value, but the (rather counter-intuitively) appreciating dollar itself reduces inflation and thereby demand. For the medium term, with nominal economic growth due to exceed mining output, the potential for gold to climb again is evidently in place.
Yet, whether the necessary sentiment matches and is prepared to back that opinion will be the (very elusive) determinant of whether investors should buy accordingly.
