The geopolitical rise and fall of crude and gold

It is well recognised that the crude oil and gold markets are always susceptible to geopolitical developments. More often than not, rather than an actual event, rhetoric from adversaries impacts the sentiment.

We have seen umpteen times in the past that the rise and fall in the prices of the two commodities are directly related to escalation and de-escalation in geopolitical tensions. Alongside, we find the flow and ebb of speculative capital, as is its wont. It is no different this time.

Set pattern

Both crude and gold markets rallied following the US drone attack on the Iranian general and Iran’s retaliatory action. Tensions spawned by such events peter out either quickly or gradually, unless the actions result in an escalation towards conflict. This time the change in sentiment has been dramatic, much against the expectation of bulls.

After spurting to over $68 a barrel on Tuesday, Brent quickly shed the gains to move down to around $65 a barrel the next day. This followed the market’s belief, based on certain political statements, that the situation may not deteriorate. For the time being, a stronger military response from the US appears unlikely.

In other words, oil has pared almost all the gains it made since the start of the new year. Reports of the US inventory build-up added to the selling pressure.

Gold volatility

Gold, the punters’ eternal favourite, suffered a greater pounding. After rallying to well over $1,600 a troy ounce – the highest since March 2013 – on Tuesday, the precious metal registered one of the sharpest falls the following day, to trade at some stage at around $1,540/oz, a collapse of $70/oz. Profit-taking, as evidenced by the outflow from ETFs, contributed to the slump.

All this happened just when speculative investors in the yellow metal thought there would be a further rise in price. But that was not to be, demonstrating once again the fickle nature of this market.

Price stabilisation

So, where do we go from here? From a fundamental perspective, the crude oil market appears reasonably well supplied in the first quarter of this year. So, with the risk of supply outages waning, the crude oil market should stabilise. The risk premium will evaporate. Brent is likely to trade in the $60-65 a barrel range.

While geopolitical tensions may not be simmering or boiling over, the risks have not completely gone away; the situation is simply less grave than before. We cannot ignore the undercurrents. Despite some profit-taking, bullish bets on crude are likely to continue. The situation needs a close watch for early signals of new developments.

As for gold, the massive slump in prices should unnerve punters. Tensions in West Asia are decidedly easing. Instead of military conflict, the US President may impose additional economic sanctions on Iran.

Gold may not glitter

Together with positive labour data and the firming dollar, investors’ risk appetite is set to improve. Central bank purchases, too, have turned few and far between. These do not augur well for gold. One can expect a further price correction in the yellow metal towards $1,500/oz.

Silver’s fortunes have followed gold, but with greater pressure. Silver did not outperform gold on the way up, and on the way down, finds itself under increasing pressure, having dropped $17.8/oz.

(The author is a policy commentator and commodities market specialist. Views are personal)

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