The Hindu Business Line : Gold was the best, oil the worst

Ironical, isn’t it, that gold should be the best performing commodity in a year when crude oil turned out to be the worst? After all, gold prices have historically marched in-step with crude oil. Remember that gold attained its previous record of $850 an ounce during the oil crisis of the eighties. In 2008, gold prices (in dollar terms) have gained 6 per cent while crude oil has lost 62 per cent.

Dollar tunes

More than inflation fears, it is the gyrations of the US dollar that have been the biggest influence on gold prices this year. Between January and April, the yellow metal rose 12 per cent, as dollar was depreciating. With the dollar taking a u-turn from June, gold erased much of these gains and turned volatile. Over the last month, as more global economies grapple with a slowdown or recession, gold has been on the path to recovery. Mounting fiscal and trade deficits for the United States and fear of a deepening recession (negative signs for the dollar) are all positive for gold.

The unprecedented surge in commodity prices led by crude oil that flagged off in mid-2007 came to an abrupt halt in mid-2008, after the curtains went down on the Chinese Olympics. The commodity barometer- the CRB Spot Index, rose 50 per cent from January to peak in July only to fall precipitously thereafter. What began as an unwinding of speculative positions in response to lower Chinese demand quickly turned into carnage in commodities, as the spectre of global recession took shape.

After the reams written about the “peak oil” theory, who would have thought crude oil would be the worst performer in the commodities basket in 2008? Currently trading at $39 a barrel, oil has lost 62 per cent over the year. Oil rose sharply between January and July and peaked at $147, accompanied by much hype and speculative build-up. Prices took a tumble after a steep slowdown in demand became evident and the US, followed by UK and Japan slipped into recession. Production cuts from OPEC and a revival in demand as prices fall, may be vital, to revive the prices for Black Gold. However, even at $39 a barrel, no one is sure about whether oil prices have bottomed out.

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