Gold and oil face contrasting fortunes in Q4

Safe-haven buying will prop up bullion, while Covid-19’s economic impact may sap oil demand further

Emissions rise from an oil refinery in Texas, US. The twin trends of reduced oil demand and increased investment in renewables are likely to pressure crude prices in the medium to long term. Bloomberg

The fourth quarter of 2020 started with the same macroeconomic challenges that sent gold prices soaring and oil prices floundering in the second and third quarters.

The coronavirus pandemic flared up again in October as fears about a second wave of infections in large markets like the EU, US and Canada became reality.

Oil prices took a hit because expectations of a rise in demand for crude oil were flummoxed by weak data from the travel industry, which recorded the lowest summer demand in history.

The International Air Transport Association survey for August reported a drop in revenue passenger kilometers (RPKs) of 75.3 per cent compared with the same month last year. The Middle East was hit particularly hard with a drop in RPKs of 91.3 per cent. Travel and related fuel demand faced a less gloomy scenario in the Asia-Pacific, but there was still a drop of 69.2 per cent in that region as well.

Travel may be in the doldrums because of Covid-19 test requirements dragging on appetite, but trade between the US and China is back on the rise. The Asian giant’s exports to the US grew by 9.9 per cent in September on an annual basis, while imports rose by 13.2 per cent. If it continues, this trend ought to support oil demand.

Geopolitics is another major factor affecting oil prices. However, there is a lack of market-moving events to support oil demand. On the other hand, as winter set in, weather events such as Hurricane Delta squeezed supplies in the US. The Gulf of Mexico was mostly affected after 91 per cent of its offshore crude oil production, amounting to 8.8 million barrels, was put on hold.

The Organisation of Petroleum Exporting Countries plays a big role in the movement of oil prices. The organisation surprised investors when it said that oil demand will plateau in a decade and then decline as a result of the pandemic. Also, more oil producers are investing in renewable energy. The twin trends of reduced oil demand and increased investment in renewables are likely to pressure crude prices in the medium to long term.

The short-term pressures on oil prices are the pandemic and the efforts to find a vaccine. The Opec+ alliance’s supply cuts stabilised the oil price at about $40. Under current circumstances, it is unlikely that the oil price has enough support to appreciate significantly before the year end.

Gold prices tell a different story, however. Safe-haven buying sent gold prices soaring by nearly 30 per cent over the past year. The precious metal remains in favour as second waves of Covid-19 infections affect economies around the world.

November’s presidential election in the US may support gold prices even more as investors react to political uncertainty. With almost all factors pointing towards support for gold prices, the exception is the direction of the US dollar. Even the slightest increase in the greenback’s value inversely affects the gold price. But as investors dither between the two safe havens, they also keep a sharp eye on the Federal Reserve’s low interest rates and at the next sign of uncertainty, gold may regain lost ground.

After the US election, gold prices may settle down but are likely to receive sustained support from the impact of the pandemic.

Although gold and oil are affected by different factors, they may have one thing in common: a coronavirus vaccine. If a vaccine passes all tests by the end of the year, it would likely turn the tables for gold, which may see a price deflation as investors shed their anxiety and increase their risk appetite. In this scenario, oil prices may see a sharp rise as confidence returns to the markets.

Barring the development of a vaccine, I expect oil prices to remain subdued and pressured by the pandemic. Gold prices may be sustained at their current high levels because of safe-haven buying until the end of the year.

Hussein Sayed is the chief market strategist at FXTM.