Both gold and crude have recently shown strong performance, including unprecedented record levels recorded by the precious metal. Let’s look at some key factors that contributed to this remarkable performance in the commodities space. This will help traders find guidance while making investment decisions in the financial markets, especially when new developments may arise in international monetary policy as well as the global economy in general.
Gold’s performance
There is traditionally an inverse correlation between gold and the USD, as the rise of the former could mean a decline of the latter. The dollar has recently declined following the Federal Reserve‘s meeting concluded on May 1. Additionally, employment data is indicating a further decline in the USD due to labor market conditions and the Fed’s reconsideration of interest rate cuts. The precious metal benefited from geopolitical factors in the context of the US-Iran tension and the war in Gaza.
Federal Reserve’s signals
The Fed kept the interest rate unchanged — in the range of 5.25 to 5.50 percent. It also decided to reduce the monthly volume of sales of U.S. Treasury bonds and real estate mortgage-backed securities to $25 billion, from $60 billion previously.
Meanwhile, the U.S. central bank spoke positively about the balance of risks it is facing in achieving its mandate — such as, price stability and maximum employment — in addition to considering the positive U.S. GDP readings at the 1.6 percent mark in the first quarter of 2024.
Fed Chair Jerome Powell suggested that the labor market has recently achieved “balance” and that the next move for the federal interest rate will not be a hike. This raised speculation that the current rates would either remain unchanged or be cut for the remainder of the year.
Employment data
Recent U.S. employment data indicated a decline in the U.S. labor market as well as deteriorating employment conditions and wage growth. This negatively affected the U.S. dollar, forcing it to retreat in favor of gold.
The last NFP reading indicated the addition of only 175,000 jobs in April, compared to the previous reading’s 315,000 jobs. Wage growth also declined, which is constant in the annual reading of the average hourly earnings index. It recorded 3.9 percent in April, compared to the previous reading of 4.1 percent. The U.S. unemployment rate rose to 3.9 percent in April, compared to the previous rate of 3.8 percent. This indicated a level higher than market expectations, which was 3.8 percent.
Geopolitical tensions
The impact of geopolitical tensions is still strongly present on the financial scene. This is seen in the movement of the price of gold. These expectations have renewed escalation due to the start of military operations in Rafah. Meanwhile, the truce talks in the Middle East have reached almost nothing.
Central Banks’ gold purchases
In March, China added 160,000 ounces to its national strategic reserve of gold — as part of moves to diversify foreign exchange reserves. This marks the 17th consecutive month of increase in Chinese gold reserves. A similar trend in other countries in Asia and Europe could follow – this will undoubtedly be in favor of the precious metal.
Crude oil’s performance
Oil’s story may be similar to that of gold, but it’s not quite the same.
Downward pressures
The updated World Economic Outlook issued by the International Monetary Fund, titled “Commodity Report”, reflects several concerns about the possibility of a decline in black gold. The said report revised global growth expectations, indicating a decline. This translates into an expected drop in overall global oil demand levels, which have already put downward pressure on oil prices in April 2024.
International economy
Global economic conditions remain the primary driver of global oil prices, as growth means more oil consumption and then increased demand. This consequently leads to higher prices. This is closely linked to monetary policy and its global direction, which is led by the Fed.
The Fed’s last meeting kept interest rates higher for longer. The Fed wants to cut interest rates, but it warned that inflation has recently risen to more than market expectations, which may delay the cut and threaten a global recession.
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Output policy
The OPEC+ production cut in April 2024 was met with an increase in U.S. oil production. It threatens to undo the group’s efforts to reduce production in order to boost global prices.
In addition, there are expectations of further increases in U.S. production rates, especially following the White House’s pledge that fuel prices will remain affordable for everyone as the summer holiday season approaches.
US oil stockpiles
The Energy Information Administration announced that U.S. crude oil inventories fell by about -1.36 million barrels in the week ending May 3. This figure was in sharp contrast to the previous reading, which recorded a rise of 7.26 million barrels.
The decline in inventories reflects the increase in demand for oil in the U.S., which leads to higher prices. High inventories lead to exactly the opposite, pushing prices downward because they indicate that oil demand is suffering in the world’s largest economies.
Finally, geopolitical tensions may intervene if they happen to escalate. This may push prices higher due to concerns about the trade route of crude oil exported by Gulf states and Iran.
Mohamed Hashad is chief market strategist at Noor Capital.
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