2020 has mainly been affected by the coronavirus pandemic that has shattered every sector of the global economy. But, the year of the pandemic has put two commodities under the spotlight for various reasons. Gold hit an all-time high of $2,074 in August while crude oil dropped into the negative zone for a day in April. The drop into the negative territory happened when demand crashed and inventories soared.
So far this year, both gold and oil have seen much volatility. Oil prices started 2020 at over $60 a barrel. Then, they crashed to the lower teens in April with front-month WTI Crude futures plunging to as low as -$40 for a day. After that, the prices of the ‘black gold’ rose again to $40 from where they have remained rangebound since then.
The massive crash in demand pushed the price of oil lower. On the other hand, elevated uncertainty over the global economic outlook and oil demand recovery coupled with worries of a second COVID-19 wave pushed investors to seek haven assets like gold. That increased demand drove the price of the precious metal to an all-time high last month.
These wild rides in the two commodities may represent buying opportunities according to various analysts. Many expect that oil and gold will rise in the medium term.
Oil Vs Gold Movement
In the case of oil, the uptrend might not come as soon as it could in gold since the increasing concerns about stalled demand recovery may limit its upside momentum. Nonetheless, analysts and investment banks think that prices will increase from the current levels in the next 12-24 months. That will most likely happen especially if an effective vaccine manages to hit the markets in 2021.
Low or negative interest rates for gold together with continuous economic stimulus and the perception that gold is a reliable hedge against economic uncertainty are expected to drive prices higher. Also, the looming tension arising from the approaching US elections may push the price of the precious metal higher in the near and middle-term..
The Director of Research at Kopernik Global Investors, Alissa Corcoran, told reporters that the short-term volatility in the commodities may act as an opportunity instead of a risk. She told Bloomberg Radio this week:
“gold still has a way to go” and could likely hit $5,000 per ounce. Even if gold does not go anywhere, mining companies still have upside because they are now trading 50-60 percent lower than they were in 2011 when gold was at levels similar to today’s.”
Most of the other analysts are also bullish on gold. Some of them expect the price of the precious metal to surge above $3,000 and even $5,000/ounce in the medium term. Citigroup and billionaire Thomas Kaplan, founder of New York-based asset management firm Electrum Group thinks that a $5,000 gold price is possible while Bank of America Merrill Lynch thinks gold to hit $3,000 by early 2022.
Experts Have Their Say
On September 10, spot gold prices reached their highest level in over a week trading at $1,956, on weaker U.S. dollar coupled with an unchanged policy from the European Central Bank (ECB). David Madden at CMC Markets said:
“In the past few weeks, the commodity has been directionless but more recently it has been pushing higher, and while it holds above the 50-day moving average at $1,916, the bullish move is likely to continue.”
Head of FX Strategy at Saxo Bank, John Hardy, said on September 10:
“Overall, the market remains rangebound but a record run in gold being accumulated via ETF’s highlights the strong underlying demand that is likely to continue as long the weak dollar/rising inflation/stimulus themes continue to be the focus. Local resistance at $1950/oz with a break opening a move to $1977/oz.”
In the meantime, crude oil prices have experienced a correction in recent weeks enabling them to adjust to weak fundamentals. Ole Hansen, Saxo Bank’s Head of Commodity Strategy, said:
“We do not believe that we will see a new dramatic sell-off in crude oil but have to accept that the coronavirus and doubts about the timing of a vaccine may continue to delay until next year, the recovery back towards $50/b on Brent crude oil.”
Turning to the near-term prospects, demand recovery is not constructive for oil prices. However, analysts think that oil might move at least $10 higher in 2021. For instance, Goldman Sachs expects Brent Crude to reach $65 a barrel in Q3 2021. But, it could end the year lower at $58 per barrel.
Currently, many uncertainties surround the global economic growth and oil demand recovery are expected to keep oil prices subdued in the short-term. However, all these factors can support a rally in gold as a haven asset class. Therefore, the hyper volatility in the two commodities this year may not be a bad thing after all.